Diary

Unstimulating

Let’s turn the microphone over to Amity Shlaes, who discusses Obamaian plans for an economic stimulus by bringing up the inconvenient facts about the stimulus plan passed earlier this year:

The limits start showing up with the tiniest of stimuli, those government checks Americans received in the mail last spring. The idea was that having the cash would cheer up consumers so that they would start shopping again, helping retailers. That in turn would revive wholesalers, shippers, suppliers — on up the production line.

But that stimulus failed, as the University of Michigan’s Joel Slemrod and Matthew Shapiro noted. Interviews with consumers showed that only a fifth said they would spend their cash.

Savings rates tracked by the Bureau of Economic Analysis seemed to confirm that, with personal savings rates rising about the time the checks were mailed. Slemrod and Shapiro weren’t surprised. They have spent much of their careers documenting failed stimulus plans. Their study of the effects of the 2001 Bush stimulus was so damning you might think that Washington would never repeat it. But Washington did.

One reason consumers don’t want to spend is that they don’t react instantaneously, as Keynes posited they would. They follow, rather, the theory of an economist oft-presented as the anti-hero of the moment, Milton Friedman. Friedman’s permanent- income hypothesis said that consumers consider their entire future, and not just their mood, when they shop. If expectations of lifetime earnings drop, then so will spending. That too tracks reality. Many of us are beginning to wonder if we will ever get back the price we paid for our houses.

Shall I mention again how Shlaes is right?