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Politics : View from the Center and Left -- Ignore unavailable to you. Want to Upgrade?

To: JohnM who wrote (102674)	2/1/2009 6:42:30 AM
From: Lane3	Read Replies (1) \| Respond to of 542495

"Brad DeLong links to Megan McArdle saying something wrong about the effects of a temporary increase in government spending. But he fails to note that it’s not just wrong, it’s 180 degrees wrong: a temporary increase in government spending should have a larger impact on demand than a permanent increase, not a smaller impact." I read McArdle's point in her blog yesterday. It made sense to me. "The basic idea is that people are forward looking, and they try to smooth their consumption over time. So if you give them a "temporary tax cut", they save most of it, knowing that eventually they will have to give the money back. But of course, this should also be true of "temporary government spending"--if people think the money won't be there next year, they'll salt as much of the money away as possible. This is a topic very underexplored in the various estimates of the stimulus multiplier, even though consumers are massively overleveraged and will presumably save as much of their new income as they can."