The Abracadabra Stimulus Plan

The $787 billion economic stimulus President Obama signed into law this week rightly recognizes that spending stimulates the economy. That measure, however, misses the mark: It is targeted, demand-driven consumer spending is the engine that grows economies, not frivolous government spending for future “needs.” We have forgotten what Harvard economist and past president of the American Economic Association, Frank Taussig, told us in his 1911 book, Principles of Economics: “We must accept the consumer as the final judge.”

As recent history teaches, economic crises arouse an emotional panic that tempts us to believe that centrally planning the economy is the medicine for economic recovery and the best safeguard against future volatility. To make matters worse, spin doctors lead anxiety-laden people to believe the notion that without government oversight we are doomed. This history displays a major moral temptation of economic crises: a prideful belief in our capacity to “save” the economy by controlling the decisions of the millions of human beings who participate in it every day.

The panic of the Great Depression provided incentive for the founding of the Cowles Commission for Research in Economics in 1932 by businessman and economist, Alfred Cowles. The Cowles Commission attempted to link economic theory to mathematics and statistics. Henceforth many economists operated on the misguided presumption that they could predict the future preferences of consumers using math. This wizardly attempt to pair mathematical equations to the future desires of 300 million people exhibits the same kind of hubris that underlies the idea of spending billions of dollars to create artificial demand for so-called “new jobs.”


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