My simpleminded understanding of the rationale behind Keynesian stimulus looks something like this:
Everyone’s scared because there’s a recession on, so they’re saving their money rather than spending it on stuff — which means less stuff gets bought, so less stuff gets made, so fewer people have jobs making stuff, and so on in a vicious cycle. If we borrow money at low interest rates and give it to people, they’ll go out and buy stuff, which means more stuff will be made (to satisfy the increase in Aggregate Demand), and the stuff-makers will have to hire more people to make the stuff. Those people will get paid to make stuff, and will therefore have more money to buy stuff, increasing AD even more and so on until we climb out of the recession and hit something not entirely unlike full-employment equilibrium.
It sounds great, but there are a few implementation issues that get glossed over. The first one is how you get the borrowed money to the people. Maybe you find a bunch of unemployed folks and give them Good Government Jobs digging holes and filling them back in. Maybe you give the money to state governments and well-connected government contractors, as we tried most recently. Or maybe you just cut everyone a check, as we tried before then. However you make it work, you’re giving money to scared people and expecting them to spend it as if they were sanguine. Yeah… not so much.
The next problem is the leap from “more stuff gets produced” to “more people have jobs producing stuff”. Turns out, not so much. Here’s a relevant graph from Arnold Kling:
Explain why, with unemployment over 9 percent, there has emerged the phenomenon of self-service frozen yogurt shops.
Tyler Cowen finds some additional relevant figures:
Over the past 10 years:
• The U.S. economy’s output of goods and services has expanded 19%.
• Nonfinancial corporate profits have risen 85%.
• The labor force has grown by 10.1 million.
• But the number of private-sector jobs has fallen by nearly two million.
• And the percentage of American adults at work has dropped to 58.2%, a low not seen since 1983.
Could it be that creating employment isn’t as simple a matter as simply dropping money out of a helicopter? Could it be that improving the economy is simply too hard a problem for one person — or five hundred and thirty eight — to analyze, solve, and orchestrate, let alone sell to an apathetic audience in carefully-chosen sound bites? Ya fuckin’ think?
(Oh, where is all that stuff coming from if the number of stuff-making people hasn’t increased? Robots.)