Monday, 19 May 2014

Propensity to consume is irrelevant for stimulus.

Atif Mian and Amir Sufi fall for one of the most popular myths in economics, namely that because some group has a high propensity to consume, that therefor we get better value from each dollar of stimulus if stimulus bucks are concentrated on such groups. The actual group Mian and Sufi concentrate on are underwater households, but that’s by the bye.
The flaw in the above argument is that stimulus costs nothing in real terms, thus it makes no difference what sort of “bang per buck” one gets from a particular form of stimulus. I.e. the only important question is: what maximises GDP or output per hour’s work (within environmental constraints of course). Bang per buck of different forms of stimulus is irrelevant.
And that’s not the argue that there might not be reasons for assistance for underwater households (though I’m skeptical). For example it might be argued that government has been negligent in failing to rein in banks offering NINJA mortgages, and thus that society as a whole owes some sort of compensation to NINJA mortgagors. But that a separate point from the above stimulus point.

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