First they clock you on the head, then they revive you and call it a “stimulus”

Economic theory is confused almost to nullity. Part of my Classical Economic Theory and the Modern Economy (available from June) is a detailed discussion how modern economics, particularly the macroeconomic side, has made it almost impossible to talk about economies in a way that makes sense because of the terms we now use. This latest proliferation of the term “stimulus” to refer to the efforts to minimise the harm inflicted on our economies by closing them down is an example that had not even occurred to me. It will now make its way into the final text. Here’s the definition of economic stimulus from the net:

 An economic stimulus is the use of monetary or fiscal policy changes to kick-start growth during a recession. Governments can accomplish this by using tactics such as lowering interest rates, increasing government spending, and quantitative easing, to name a few.

Whatever you might call what is being now done, it is not a “stimulus”. Even economists can no longer distinguish the present attempts to minimise the structural damage caused by government restrictions on the economy with an attempt to “kick start growth”. The plain fact is that they have no idea what they are doing although for a change they are doing the right thing.

But here is how it will have to end in about three months time when the Corona Virus is finally declared under control. They will have to raise interest rates a couple of percentage points to pull all of this money out of the system. It won’t take much of an increase but that will be crucial.

In the meantime they should cut wages among the non-essential members of the public sector by 20% at a minimum. I would do it on a permanent basis, but do it at least temporarily until the emergency is over.

1 thought on “First they clock you on the head, then they revive you and call it a “stimulus”

  1. Any chance you can do a ‘stop press’ type chapter in your book on the Wuhan virus and govt response? You could explain the difference between ‘silly stimulus of demand’ versus ‘reasoned support of supply’. ie. it is a great opportunity to bring Classical eco to lead the way for today.

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