What Is The Mechanism? Or Is It Just A Miracle?

by Mario Rizzo  

In Sunday’s New York Times, Paul Krugman says:  

“From the beginning, I argued that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, was too small. Nonetheless, reasonable estimates suggest that around a million more Americans are working now than would have been employed without that plan — a number that will grow over time — and that the stimulus has played a significant role in pulling the economy out of its free fall.”  

He admits a mistake of a sort. However, he does say that fiscal stimulus is the “[l]ast and probably least, but by no means trivial…[of] the deliberate efforts of the government to pump up the economy.”  

The over-all theme of the article is that big government is our salvation.”[U]tter catastrophe no longer seems likely…Big Government, run by people who understand its virtues, is the reason why.”   

Post hoc ergo propter hoc?  

How do we know that fiscal stimulus played a non-trivial or any helpful role in the apparent easing of the rate of decline in economic activity?  I think we need a theory and evidence.  Continue reading