Tuesday, December 16, 2008

Me and Paul: The joys of blogging

Paul Krugman shows you don't win the Nobel prize by thinking small. He's calling for a massive Keynesian fiscal stimulus. Not just here, but all over the world! I just hope he remembers to tell us when to stop:

To understand the problem, think of what would happen if, say, New Jersey were to attempt to boost its economy through tax cuts or public works, without this state-level stimulus being part of a nationwide program. Clearly, much of the stimulus would “leak” away to neighboring states, so that New Jersey would end up with all of the debt while other states got many if not most of the jobs.

Individual European countries are in much the same situation. Any one government acting unilaterally faces the strong possibility that it will run up a lot of debt without creating much domestic employment.

For the European economy as a whole, however, this kind of leakage is much less of a problem: two-thirds of the average European Union member’s imports come from other European nations, so that the continent as a whole is no more import-dependent than the United States. This means that a coordinated stimulus effort, in which each country counts on its neighbors to match its own efforts, would offer much more bang for the euro than individual, uncoordinated efforts.

He even provides us with the math, so there can be no doubt. Except I still have doubts, and so do many others. See all the comments, especially this one. Here is mine:
Sounds like you're claiming there are spill over effects with a fiscal stimulus, which I agree with. Thus you're calling for coordination in Europe. Wouldn't that rosy scenario lead to spill over effects outside Europe? So would you really like to see world-wide coordination? Even if that were possible, and all spill-over effects neatly cancelled each other, then where are we? Yes, we might have a short term benefit of slightly higher demand than otherwise would be, but we'd be stuck with the very real and enduring cost of more government control of the economy. If that sounds good to you, I suggest you go to your local post office and think about it while you stand in line for hours.

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