At the recent American Economic Association annual meeting, economist confronted the stimulus package. According to a story in today's New York Times - More Economists Warm to Government Spending:
Nearly every economist who spoke here agreed that a dollar invested in, say, a new transit system or in bridge repair is spent and respent more efficiently than a dollar that comes to a household in a tax cut.
Yet, the Obama stimulus package is going to devote 40% of the stimulus to tax cuts. The buzz circulating around Washington is that this is being done in part to get the GOP on board. Whether that works or not remains to be seen. As the Washington Post reports:
Rank-and-file Republicans questioned the details of the stimulus plan, large portions of which were negotiated over the holiday break by Obama advisers and Democratic staff members, and suggested that could set the stage for how the Obama agenda takes shape over the next two years.
"Somebody needs to slow this train down," said Sen. Jeff Sessions (R-Ala.), warning Republicans that they should not accept "small, temporary tax cuts" -- which Obama advisers have pegged at $300 billion -- "in exchange for massive federal spending."
I'm not going to opine on whether or not tax cuts should be part of the stimulus package. But I do find it interesting to see the phenomena of politicians running to embrace tax cuts as a fiscal stimulus when economics economists are moving away from it. A clear indication of the tendency to "fight the last war."
The same type of thinking pervades too much of policy making in the I-Cubed Economy. Much of our competitiveness policy is a rehash of the 1980s, attempting to simply restore what was gutted over the last decade. Our "innovation" policy is still rooting in the post-WWII thinking of the linear model of technology development: R&D in; gadgets out.
As Keynes warned, “The difficulty lies not so much in developing new ideas as in escaping from old ones.”
The difficulty is that from the point of view of micro -- most especially the micro of market coordination using non-permanent heterogeneous production goods (see Hayek, 1941) most macroeconomists are witch doctors and cargo cult shamans.
Keynes, of course, was the witch doctor in chief.
We are in a situation similar to 200 years ago, when the ill were prescribed leaches by quack doctors. Doctors routinely killed patients like George Washington.
Today's macroeconomists = leach prescribing doctors of 200 yeas ago
It's pseudoscience, all the way down -- and the public deserves to know it.