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Wednesday, January 7, 2009

A Note on Hal Varian's View of Economic Stimulus

First, let me say I have a lot of respect for Hal R. Varian and I love his advanced micro text(s). That being said, he says:

"Ultimately, we want to end up with a significantly higher savings rate in the U.S. than we have seen recently. That means some other component of demand must increase to compensate for the reduced consumption. And the most attractive candidate by far is private investment."

Of course, in an ideal world and under 'normal' economic circumstances, private investment is the most attractive candidate, but as Hal even mentions, people and businesses and banks are hoarding cash. So tax incentives for investment can only go so far. Government spending is the only direct route to compensate for reduced consumption. And of course, it is no magic bullet either as even Obama says we will have huge deficits for years to come.

Finally, Varian's criticism of governement spending may not hold under an obama administration with a sympathetic congress. He says:
"it takes too long for the government spending to kick" and
"spending may easily focus on pork-barrel projects that have little inherent value"

... both of which Obama has directly commented on saying would NOT happen. And, given his political capital, there is reason to believe him.

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