I think the multiplier effect, from the bailouts and the stimulus, which represent a pretty massive transfer of wealth to the politically connected, is the explosion of the class critique of the State. There is no such thing as a "free lunch;" Keynesian wishful thinking aside, the political economy exacts a tax, it always does...

This isn't a debate about what will promote economic growth in the long term and what will help the economy reach its greatest efficiency. This is a debate about short term responses to an economic recession.

I am open to arguments about specific types of tax cuts, but just look back to how consumers spent the rebate from Bush's stimulus. They used it to pay off credit card debt or save away for the future. They didn't go out and spend it, which is what the economy needed.

A stimulus built around government spending might spend money on programs that are ineffective and unnecessary, but it would at least be spent and have more of a multiplier effect than just tax cuts.

I know you're familiar with Hayek and Keynes, and Bastiat's Broken Windows Fallacy, and I'm surprised you're taking the side of Keynes. Not an attack, I'm just surprised.

The Bush "stimulus" didn't work due to this basic premise: every dollar the government injects into the economy was first taken out of the economy. If you take from Peter and give to Paul, and only look at the effects on Paul, you're going to get a false impression. Paul is now incentivized by $x received, but Peter is now disincentivized by $x. Mathematically it amounts to zero. That should never be compared to marginal rate cuts. But as for the argument of paying off credit card debt and using for savings, that money doesn't vanish into the ether. The lenders receive that money and will spend or invest it somewhere, or when saved, it's spent on capital goods.

To use an analogy, the damage was caused by a caffeine high, and the recession serves as the caffeine crash. We can respond in two ways: more caffeine, which will do temporary relief and energizing followed by a bigger crash later, or we can let the crash run its course, which is painful right now, but will get the junk out and enable full sustainable recovery later. I think the choice would be self-evident. Government spending, however, is the first.

Also, jobs are not the goal of an economy. Higher living standards are, and individuals are the ones to determine what higher living standards are for themselves. If they are saving, that means they want to consume more in the future than they would if they didn't save. It provides a signal for investors to invest in the early capital stages (product development, raw materials, etc...). Besides, savings IS consumption, it's consumption of capital goods. I'll direct you to Henry Hazlitt's Economics in One Lesson, The Assault on Saving chapter http://www.nontaxpayer.net/onelessn.html (number 23)

Finally, here's Sheldon Richman's interview Is the Stimulus Working?

The Silent Consensus

Not to be rude here, but I doubt that really has to be explained again. FDs point was about what was -- and is -- most likely to occur in response, and what was likely is exactly what happened: short-term stimulus. Obviously the long term effect is debatable at best, it didn't seem to me like that was being denied.

100% correct. Politically, I don't think anyone out there is able to make the case that a ruling Republican Party would somehow not give in to the temptation to pass a short term stimulus for political gain.

In the long run, we may all be dead according to Keynes. But I think Keynes was woefully naive about the long run implications of his theory. Malinvestment? Encouraging the next bubble? Decades of deficit spending? Convincing the elite that deficits don't matter so don't worry about repaying debt during the good times? All of them are problems created by adopting Keynes during the bad times. But that's just accepting our political system for what it is, not advocating that it ought to be that way.

I realize I misunderstood what you were trying to say. In terms of GDP, you are probably right. In terms of individual utility, I'll take tax cuts

The Silent Consensus

Robert Lucas' Rational Expectations(for which Lucas won the Nobel Prize for in 1995) overthrew the idea that fiscal policy would even work in the short run. Even though I've written about the demise of this 4th generational chicago school, rational expectations, by and large, still remains true, especially in terms of ,say, random walk theory of stock prices. The flaw in Ration Expectations was that people could be tricked into believing they were wealthier than they actually were, in large part because of government actions extending back to the 90s in bailing out in leveraged firms(such as Long Term Capital Management). If we take, for example, Milton Friedman's "permanent income hypothesis," that is, people's level of consumption that can be sustained while leaving wealth intact, we can, under a rational expectations model, see how people, if tricked into believing their wealth is increasing(under asset bubbles), will increase consumption leading to a boom economy. Of course, when the delusion ends, people will readjust consumption accordingly. So, if people are basing their consumption on their wealth, and not their current disposable income,temporary tax cuts, even if they increase current disposable income, will then have likely little effect on consumption.

However, this is not an argument for old time Keynesian Demand Spending; it was utterly discredited in the 70s. The Austrians are right here, the malinvestment needs to be cleared out, not propped up, especially propped up as a function of political connections. Monetizing massive new debt, with most of the spending, frankly, going to the public sector or politically connected private sector firms isn't going to do much for the private economy today and is going to exact a significant effective tax in the long run, a stagflated economy...

While I tend to agree that the psychology of temporary tax cuts means they will have little effect on consumption, I do think that the psychology of government spending and direct hiring of individuals will have an impact on consumption. You can't fool people with temporary tax cuts, especially when they are in the middle of a bubble bursting, but I think you can fool people with government created jobs. Again, not because I don't agree with the need to clear out malinvestment or because I ignore the problem of paying off the debt in the long run. Just because of my suspicions on voters.

politics may be an avenue to "create jobs" via fiscal policy, but to think the aggregate markets are fooled by this is another matter...

Anytime I watch Cable TV, I'm struck by the plethora of advertising regarding Gold. It's ubiquitous. One of the inmate actor dudes from HBO's 'Oz' is peddling gold, now. I'm watching the Weather Channel or the History Channel and I'm seeing people peddle Gold with the "Ron Paul Seal of approval," for god's sake...