Released November 9, 2009

RALEIGH, N.C. -- There's much debate going on about the effectiveness of the federal government's stimulus plan for the economy. But let's go back to basics. What was the original rationale or reason for the idea of the government spending money to jump start the economy?

Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Economic ideas do have origins and oftentimes these things get criticized. But there are some basic origins for a lot of these economic ideas, and one, of course, is for the stimulus plan.

And this really goes back to the 1930s and an English economist named John Maynard Keynes. Up to that point, the conventional reasoning was that if you had a recession, it was due to problems on the business side, on the production side. Businesses simply weren't producing enough; therefore, they weren't hiring enough people, so incomes were down and that was the problem in the economy.

Keynes broke with that, and said, no, equally, there could be a problem on the consumer side, on the spending side; that is, that consumers simply aren't spending enough money, maybe because they're fearful, they're uncertain about the future. But the bottom line is they're not spending enough. And if they're not spending, then businesses aren't going to produce.

What he was trying to do is see where was the crux of the problem. So he argued that if it was a problem of spending on the consumer side, therefore, one way to address this would be to have the government come in and in the place of the consumer, directly spend money. His argument was by the government spending money that would stimulate the economy, that would stimulate businesses to produce more. They would hire more people. He also argued this would not spark higher inflation or higher interest rates because you did have so much slack in the economy at the time of a recession. And this idea, which is really the origin for our current stimulus plan, is still being debated by good economists today."

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http://www.ncsu.edu/project/calscommblogs/news/archives/2009/11/economic_perspe_487.html