Placebo Economics

As the Freeloaders (AKA Republicans) and Illiterates (AKA Democrats) pretend to debate the stimulus bill, neither side wants to state the obvious. This package is about half the size  of the Bush stimulus package that was so remarkable ineffective last year.  The total is bigger but the Obama package is spread over two years while the Bush checks were sent over a two month period. And it is abundently clear that the economy is in much worse shape now than it was a year ago. It is true that the appearance of action (and a president who cares that the economy is bad) will probably improve the mood of consumers: This is Placebo Economics.

As I've written before, this economy requires much stronger medicine but given the to and fro about the tiny stimulus package, it doesn't look like it will get it. People have compared this crisis to the "Lost Decade" in Japan after their real estate. While we will probably avoid the worst extremes of inflation and deflation, we may muddle through the middle ground for several years; without the political will and vision to begin to clean up the problems (in all sectors of the economy, not just the banks.)

How much would it cost? It is hard to be precise but $7 trillion seems a reasonable order of magnitude. Even if we wanted to spend that much in one year, I doubt we could get away with it but we could easily spend the next eight years cleaning up for the last sixteen.