Lessons from Tyler

At an Economist roundtable, Tyler Cowen makes a bold suggestion:

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.