In Stimulus: A History of Folly, James Glassman concludes that, following Hayek’s advice, the government should not try to shape the economy as the craftsman shapes his handiwork, but rather to cultivate its growth by providing the appropriate environment, in the manner in which the gardener does this for his plants:
What is that environment? First, it provides a confidence that, in a crisis, bank deposits are safe and insurance policies will be paid in full. Such confidence can be provided only by the government of the United States in its legitimate and essential role as the lender of last resort. Second, the environment supports, rather than denigrates or browbeats, productive members of society. The U.S. will not emerge from a serious recession unless businesses and investors lead it out. Third, it recognizes that Americans have undergone a financial calamity and that we need time to adjust; we cannot, like a car battery, be shocked back to life, and we aren’t in the mood to have someone blow in our ear.In fact, stimulus may be precisely the wrong metaphor. Rather than getting jazzed up, we need to be calmed down and to take the time to learn from the Great Depression, a time when government did too much, not too little. Amity Shlaes makes the argument in The Forgotten Man, her book about the Great Depression, that the constant experimenting and meddling of the New Deal froze investors and business operators in fear: “Businesses decided to wait Roosevelt out, hold on to their cash, and invest in future years.”
Despite the warnings of Keynes, the experience of the past half-century indicates that today’s low interest rates will start having a positive effect, though it still will take many months. Meanwhile, left alone, what Hayek called “spontaneous order” will find its way forward. Using a different metaphor, James Grant, in his history of credit, Money of the Mind, wrote, “The cycle of decay and renewal is as much a part of capitalism as it is of the forest floor.” But in the 1930’s, “something in the normal regenerative process was missing. There was no decisive recovery from the business-cycle bottom. People had lost their speculative courage, and the more government legislated and taxed, the more that credit sulked.”
Stimulus — that is, fiscal intervention with the express purpose of speeding up the normal regenerative process that Grant describes — is unnecessary and almost certainly harmful, a policy based on hubris and anxiety, rather than on history and good sense. Under such circumstances, the proper way to analyze discrete proposals today for spending or taxing is on their own merits, not on their supposed ability to stimulate something else. There may, in fact, be a good reason for government to spend billions of dollars today on building highways, and it has nothing to do with stimulus. It is that long-term interest rates are at historic lows and that the right highways can boost the economy in the long term. There also may be a good reason, again far apart from stimulus, for revising the tax code and reforming Social Security and Medicare. It is that Americans now understand that the economic future is not so assured as they believed a couple of years ago, and it is time for decisions to be made — in a manner careful, sensible, and unstimulated.