From the Wall Street Journal
By Hal Varian
These days it seems like it is our patriotic duty to consume more. And if we don't choose to spend more money ourselves, the government will do it for us.
But wait a minute. Isn't it excessive spending that got us into this mess in the first place? Spending more now seems like drinking Scotch to cure a hangover.
Despite this apparent paradox, there is some logic to providing a dose of economic stimulus. But it should be more like Alka-Seltzer than Scotch. To understand what sort of stimulus makes sense, consider the economic forces at work:
In the modern economy, there are four sources of demand (consumption, investment, government and exports) and two sources of supply (domestic production and imports). When a component of demand declines, supply will ultimately have to decline as well.
In the case of the U.S. economy now, the double-whammy of wealth shocks from the real-estate bubble and the stock-market crash has made consumers understandably cautious. Quite sensibly they want to consume less and save more....