Stimulus as multiple equilibria?

Mark Thoma, via Paul Krugman.

I think the stimulus package is like driving up an icy hill. If you don't have enough momentum from the start and fail to provide enough "stimulus" to get the car over the crest of the hill, you can slide all the way back to the bottom...perhaps you can hold your position if you don't make it to the top, and then start again from the higher level...Essentially I am arguing that there are crucial economic and psychological "tipping points" that must be reached in order for the economic recovery package to be effective.

Yes, but how do you know how much gas to put in if you can't see the top of the hill?

Strange bedfellows?

I've been somewhat confused by the skepticism regarding the news that Obama's stimulus plan is largely composed of tax cuts - about 40%. Krugman Lefties think he's succumbing to Republican pressure, others fret that the tax cuts will essentially amount to welfare payments because only people making less than $200,000 a year will qualify.

I've noted before my shock that prominent academics are divided over this issue. But to be frank, I'm following this with cautious optimism (let's keep in mind that the bill has to pass!). Here is a politician actually fulfilling a campaign promise and proposing an idea that both sides of the aisle can get behind.

Until the bill passes speculation remains just that, but what really counts is how the cut is implemented. I agree with Cowen that the tax cuts probably won't drive recovery:

but less money will be wasted and...it shows that the Obama team is willing to flinch and be realistic.

When we're used to hearing figures in the hundreds of billions, saving a little money probably isn't the worst thing in the world. People may not spend the money, but if it helps people avoid defaulting on personal loans or expands credit to enterprise where it wasn't before then that's one less loan the government has to guarantee under TARP.

There's also a bit of pscyhology wrapped into this proposal. Unlike the Bush tax cuts where citizens received one large check in the mail, Obama's plan has a smaller portion taken out of each paycheck. Does this signal a move away from encouraging consumer spending and instead focusing on personal fiscal responsibility? Probably not, but it's an interesting tactic.

Predict(able)

Obama may be on vacation, but his proposed stimulus plan has garnered alot of economic debate, which is certainly not of the post-partisan variety. In case you haven't been following it, the huge surprise is a back and forth between Mankiw and Krugman. Shockingly they're duking it out over whether tax cuts or government spending is more efficient to spur economic growth. 

These are both very, very intelligent men, but lest we find ourselves trending to whatever side our political inclinations may lead, let us keep in mind that forecasting is hard. And if it's hard to predict oil or food prices, how can we seriously hope to predict what this stimulus will produce; especially when economic historians still debate the exact causes and escape mechanisms of the Great Depression. 

What we must admit and accept is that the experimentation and bold action our current situation requires could easily be hampered if we require historical precedent. This is not to say that healthy and vigorous debate is not needed; it most certainly is. But let us not forget that debate should eventually produce some action. For now, we can only hope that today's recession fears go the way of the Y2K bug, but until history proves that view, let's have something more than words in place.