“Can we really spend our way out of this mess?” –Andrew Coyne, Maclean's Jan. 26th issue

Again, a well reasoned and informative article by Mr. Coyne. I do have a couple of related points to make: Fiscal stimuli in the form of infrastructure capital projects are more efficacious than using monetary stimulus, in particular when the interest rates are all ready very low. When there is all ready a depressed demand for loans in the economy, lowering interest rates is like pushing on the proverbial rope (as Japan found out with zero interest rates over more than a decade of stagnation), and printing money is a sure way to future inflation and the ultimately higher interest rateds needed to reduce demand, and so we go around and around.

Then there is the “paradox of thrift” to consider: if I save my money, I am thrifty and wise, and gain over my non-saving neighbour. However, if all my neighbours do the same, there is not enough liquidity or capital to go around in the economy, and ultimately, we all will be worse of.

Furthermore, when the government stimulate by creating work by building roads, bridges, subways, and other infrastructures, they are doing several things: they are putting money into the pockets of the average working man, who will spend most of it (and save the rest), at a ratio of about 75/25, on average. He might buy a new car and other capital goods, or just spend it on a good time. The important point is that he will spend most of it, and so will the people with which he shares his largesse, and the economy as a whole will gain more than if the interest was lowered; especially when there is the demand destruction present as in a recession. A further benefit from infrastructure spending is that its benefits last a long time, and helps to increase productivity and econimic activity in the future.

Ultimately, we are captive of the US economy, and nothing we do domestically can replace the loss of demand from our main trading partner who takes two third of our products. It might be just as well, as Mr. Coyne intimates; that we just apply some economic band-aid while waiting for the American body to heal. But then, that would be politically untenable.