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Subject:  Re: Optimal Tax Policy Date:  10/17/2012  8:17 AM
Author:  MadCapitalist Number:  649198 of 748878

It blows my mind that the whole idea that the stimulus created jobs was based on the assumption that the stimulus was stimulative and therefore created jobs.

The idea is that the stimulus caused an increase in aggregate demand. Why wouldn't that create jobs? Or save jobs, for that matter.


This belief is caused by an elementary error. It was *assumed* that the stimulus caused an increase in aggregate demand. They *assumed* that the stimulus had a multiplier greater than 1 and then they plugged their *predetermined* multiplier into their models. Then they calculated how many jobs were supposedly "saved" by the additional aggregate demand. It didn't matter what the actual results of the stimulus were since the "results" were essentially predetermined by the multiplier.

For what it's worth, I think that the reason that Keynesian policies invariably fail is because it ignores a very important point by Bastiat. Keynesian economists look at the seen and ignore the unseen.

What Is Seen and What Is Not Seen

"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

1.2
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

1.3
Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil."

http://www.econlib.org/library/Bastiat/basEss1.html
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