by Ryan Avent

So, plug time. In addition to blogging at ryanavent.com, I'm one of the brains behind The Economist's economics blog, Free Exchange. This week, the blog is hosting a discussion among economists on IMF economist Olivier Blanchard's suggestion that pervasive uncertainty is at the root of the crisis (check it all out here).

Tyler Cowen is one of the participants. He writes:

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.

He notes that placebos often work as well as actual medication. The risk, of course, is that sometimes they don't, and where delay is costly, wasting time on a placebo when actual medicine is needed can be disastrous.

But the underlying point is intriguing -- that much of the value of action may be psychological. Even if a government plan isn't directly contributing to public welfare, the idea that something is being done which will improve things will encourage people to spend, businesses to invest, banks to lend, and so on.

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