Pascal’s stimulus bet

Go for the stimulus, if there is any chance of the Keynesians being right.

Let’s see if I get this right.

The Keynesian, “saltwater” majority of American economists – for example, Krugman, deLong, Stiglitz, and Feldstein – think a big stimulus is essential to raise output and employment. (Feldstein is politically conservative and doesn’t like the balance of the House bill, but has no quarrel with the principle.)

A minority of macroeconomists (“freshwater”, because based in Chicago) – Barro, Cochrane, Fama – think the stimulus will be ineffective and leave output and employment where they are. The reasoning escapes me, but has something to do with the idea that the same Americans who fell for the housing bubble, Bernie Madoff, and George W. Bush are Vulcans who instantaneously adjust their life-cycle spending plans to the rational expectation of higher future tax burdens to service the national debt.

Pascal’s Bet is therefore: try the stimulus.

To be exact, Pascal would recommend the stimulus as long as the expected benefit of the Keynesians being right (chance of being right x benefits of being right) is greater than any expected disutility from the assured shift from private to public consumption. Suppose Krugman has (for the sake of argument) only a 5% chance of being right, but if he is, then the stimulus will create 5 million job-years over the baseline of doing nothing. So Pascal’s agnostic policymaker has to weigh 250,000 job-years against the evil of replacing private consumption of $1200 waste-paper baskets by shamefully repainted schools.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web