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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerIt is a Newtonian law of physics. A body in motion tends to stay in motion. A body at rest tends to stay at rest.
Further, as followers of business activity know, it's also a law of economics, and that's yet another argument for a large fiscal stimulus package.
Moreover, it's also a rejoinder to the fiscal stimulus plan's critics. Market absolutists and economic conservatives will frequently state that the stimulus plan isn't needed; all the nation needs to do is "let the business cycle play out, and the recovery will automatically follow the recession" or "let the market take care of things and a recovery will appear, naturally."
Not so, according to John Maynard Keynes. Keynes demonstrated that business cycles sometimes don't cycle. In fact, Keynes demonstrated that, absent key stimulus, commercial activity can be down -- and remain down -- for years. A classic example would be President Herbert Hoover's response to the 1929 stock market and the gargantuan economic slump that followed: the Great Depression. Hoover did very little, from a fiscal policy standpoint, to stimulate the economy in 1929, 1930, 1931, and 1932, and the U.S. economy collapsed in 1929, and remained in contraction in 1930, 1931, and 1932. By 1932, the Great Depression had spread across the globe.
Economist Peter Dawson, who while in college worked several summers in Colorado, used a rural Colorado auto travel analogy.
"When I was in college a lot of rural roads in Colorado were dirt roads, some rough. Unless you had 4-wheel drive or a truck, you had to be careful not to get stuck in a rut, or mud, or run off the road because you were the only one out there to push your car out of the ditch," Dawson said. "Which meant you could be stuck, without a strong enough push. It's the same thing when the economy is in a ditch like now. Without a strong enough push from fiscal stimulus, we're going to remain in the ditch."
Fiscal Policy/Economic Analysis: Economist Dawson added that he favors an $850 billion to $1.2 trillion fiscal stimulus package, with most of it in the current fiscal year, to get the biggest bang for the economic buck, and get the U.S. economy out of this ditch.
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Reader Comments (Page 1 of 1)
1-18-2009 @ 10:18AM
johnjm22 said...
Keynes didn't "demonstrate" anything. It's all unproven theories.
Also, the Hoover in administration was very active in trying to combat the depression. Hoover enacted the following programs in response the the economic downturn: Mexican Repatriation program, Smoot-Hawley Tariff Act, Hoover Moratorium, Creation of the Reconstruction Finance Corporation, Federal Home Loan Bank Act, Revenue Act of 1932, and the Emergency Relief and Construction Act.
Taxes on the rich were also dramatically raised, and Hoover did in fact run a high deficit.
All these market interventions made the situation worse, IMO.