At an Economist roundtable, Tyler Cowen makes a bold suggestion:
I’m no expert on these matters but this seems plausible to me. And he also has this effective counter to the Something/Anything/Everything Must Be Done brigade:First, to the extent that the real problem is fear, this militates in favour of placebo policies. By that I mean initiatives which appear bold and have great symbolic value, but which don’t necessarily cost us very much. I haven’t seen us make a major attempt to identify such proposals, but it is unlikely that an $800 billion stimulus fits the bill…The reality is that we don’t actually know what will work, precisely because the problem goes beyond just stimulating aggregate demand.
Most generally, we all need to keep in mind that trying to restore public confidence is tricky. If you try hard and fail, confidence then plummets and it is even harder next time around. This is a potential problem with both the stimulus approach and the placebo approach. Most of all, I don’t think we are paying enough attention to the placebo idea. It is well known in the medical literature that sometimes placebos work as well as the drugs themselves.
As I say, this is not my thing, so I leave it to others to judge the merit of this appoach. But it sounds good to me.
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