The Poverty of Stimulus

Most economists think that macroeconomic disruptions, such as the current recession, can be understood in terms of aggregate indicators like total employment, the price level, and the money supply. But this view is misleading, particularly in the current economic situation – and, worse, it misleads us into counterproductive economic policies.

PASADENA, CALIFORNIA – Most economists think that macroeconomic disruptions, such as the current recession, can be understood in terms of aggregate indicators such as total employment, the price level, and the money supply. But this view is misleading, particularly in the current economic situation. Worse yet, it misleads us into counterproductive economic policies.

As the economist Fischer Black explained, an economy matches a population’s desires to the available resources and production technology. When an economy is operating efficiently, expectations are largely fulfilled; desires, resources, and production technology are well matched; and people are reasonably satisfied with their plans, relations, and contracts.

But if the world evolves in a markedly unanticipated direction, people’s existing plans, relations, and contracts require revision. The existing matches between desires, resources, and production technology deteriorate. While this revision occurs, resources are diverted from production, which is less efficient and less well matched with consumer desires, resulting in a reduction in the value of output – a recession.

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