This Is Not the Time for Keynes

Economist Don Boudreaux explains, in a concise letter to the New York Times, why Keynesian stimulus spending will hurt rather than help in our current situation:

Paul Krugman insists that the current stimulus plan will fail because it is too small ("Behind the Curve," March 9). We non-Keynesian economists also believe that it will fail, but for very different reasons: the chief problem is less one of deficient aggregate demand than it is one of poor coordination of the plans of producers with the (non-bubblicious) demands of consumers.

Economic prosperity requires that workers whose jobs were created by the bubble be redeployed into jobs that are viable. Stimulus spending does nothing to promote this greater coordination of economic activities -- and, by promising higher taxes or higher inflation in the future, likely interferes with the economy's capacity to coordinate. [Emphasis added.]

In other words, the real-estate bubble caused resources to be over-invested in that and related sectors (including certain kinds of financial services). Now that the bubble has burst, those excess resources need to find their way to different sectors, sectors where they will be productive. The government's giving individuals money to cause more consumption will do nothing to help that necessary reallocation of resources.