Some days I'm as confused as you about this issue, so I can't contribute much per se.

However, one thing that does strike me is that if we're suffering "a credit crunch" then that means banks are not lending the money they have. That would suggest that if you take money out of the government pot and give it to people who will put it in the bank, it will currently not go into "circulation" in the economy.

Ohhhh teh know nothing section of Barcelona loves this diary...

It has been a long-tme me-myself thinking (I am in Ego mode sorry) that we do nto knwo a jot about economy after Keynnes because the eocnomy is so different that the object of analysis has never really been studied.

It is thus necessary to study te economy properly... and one of my old crazy let's make economics a science again proposals was to ahve a flow chart with all the money in all thje forms.. not only M! and 2 and 3.. and the rest.. but the real flow of money...the units would be all the industries (porbably up tp 200 differnt types of industries and units fof commerce), bank instruments and accounts (maybe around 200 over there), then another 200 to divide the population in different greoups and structures.. and then measure the flows..

Int his way you would know exatly what th emoney is going to do if you reduce or increase taxes...

The only problem with flow chart is that some of the boxes would be outside of the country under consideration.. but I guess youc an model it with a simple flow adn assumption .. though this ould not be the case with the big blocks... the number of US dollars abroas iaextremelly important...but ideally you woudl do the sam ehting for all the money abroas and what it is doing.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

This is like savings and investment, which I don't always get. After all, what is saved is to some extent used for investment. Yet there are supposed to be cast-iron economic laws about this couple.

As to tax cuts on the upper reaches of the income distribution, there is this thought (kcurie touches on it too): those who are wealthy enough don't go down to the local savings bank, they place their savings in exotic offshore destinations. By directing a stimulus package to lower incomes, (imprisoned) domestic demand is sure to pick up.

When locusts move on, they leave nothing behind

Your interpretation is not naive but a forthright demonstration of the so-called multiplier effect of expenditures, a quantity expressed collectively as consumption. The variety of jargon economists and financiers use to signify any one instance of the same economic activity, or transaction, does intimidate many a reader. In general, such specialized language makes distinctions of differences among theoretical and teleological actions of capital market participants.

I hesitate to offer this link for your review. I am assuming this essay is an object lesson.

However, the CBO brief is instructive in that it elaborates a paradox which you identify here. It is the CBO director's testimony, "Options for Responding to Short-Term Economic Weakness." It is is a primer insofar as the text summarizes quant and qual observations reported during the immediate 12-mo period and provides an index of classical economic terms, e.g. "recognition lag," by which members of Congress ostensibly prepare cost-benefit justification for pending legislation. That justification is and will be purely semantic exposition.

Formal economists know there are several other "lag" hypotheses at their disposal to exculpate numerous deficiencies in laissez faire governance. "Recognition lag" in other words is the failure of statisticians to identify a problem in capital flows.

One will note perhaps the conspicuous absence of financial discussion, relating legal penalties (regulation) on financial arbitrage and "discretionary fiscal policy" to cost of money or time value of money (interest rate) or velocity (another ratio that fundamentally discounts present value of a "rebate") to institutional profit, generally, and US monetary policy which represents --by real and nominal measures-- the principle rationale for mediating the "uncertainty" of micro- and macro-economic capital structuration in a command economy. (NB. even as the author exculpates fiscal stimulus "options", he explicitly characterizes, or objectifies, aggregated US transaction measurement as an "open economy" manipulative.)

More important, the director does not contest the prudence of "short-term" --nominal or real-- benefits postulated by any "stimulus package." Irrespective of taxpayer consumption, the objective of any "option" is to signify nominal growth of GDP, a price metric insulated from inflation factor analysis (commodity price volatility and USD devaluation; NB. acknowledgement of FRB arbitrage through foreign central banks FX of USD reserves.).

All of which to say is this: The US Congress does not intend to remediate the structural weaknesses of the US domestinc and foreign markets. Rather, member hope to keep firm-level operational activities solvent.

The debt market rulz.

Diversity is the key to economic and political evolution.

Anonymous economist Knzn and I have been debating this posting of mine at his blog. The top two diaries are on this topic:

http://knzn.blogspot.com/

A few comments from any of you who have commented here might broaden our discussion...

Policies not Politics
---- Daily Landscape

Isn't the main difference the amount of the multiplier rather than the time lag?

A bank is entitled to lend much more than it has in deposits (the ratio is known as the 'capital requirement'). For instance if you deposit 100 of your preferred currency units in the bank the bank may be able to lend-on say 1,000 to small businessmen as you describe (this would amount to a 'capital requirement' of 10%). The multiplier effect is therefore much greater.

However if you spend the money then there is a multiplier (the shop where you spend the money uses some of it to pay an employee, who then uses it to buy their own gadget etc.) but it is much smaller.

You will note that the time lag and the size of the multiplier go in opposite directions. So in the short run its better to spend in a crisis but in the long run investment produces greater returns.