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In economic downturns, most economic activity arguably has a positive externality; when A buys services from B, not only do A and B benefit but the downturn is reduced a bit as well. (In an upturn, extra activity arguably exasperates the boom-bust cycle.) This fact can justify subsidizing economic activity a bit more (or taxing it a bit less) during a downturn. But it turns out this isn't the main rationale for "economic stimuli" now being debated; those plans are largely based on the idea that people can be fooled because they are biased. Tyler Cowen:
Let's say government can spend $100 billion today or spend the present expected value of $100 billion, stretched out over time so it is a commitment in perpetuity. Both spending programs are financed by bonds. … The Keynesian boost to aggregate demand arises because people consider the resulting bonds to be "net wealth" even when they are not. … People are tricked by the government's fiscal policy, but of course the extent, timing, and nature of the trickery is hard to predict. Is it easier to trick people "a lot all at once" or "a little bit by bit over time"? It depends. If you try to trick them slowly over time, temporal learning and adaptive expectations may work against the policymaker. But if you try to trick people a lot all at once, the trick may rise over their threshold of attention, perhaps because of media coverage.
Wise taxpayers who get stimuli tax rebate checks should mostly save them, realizing that future taxes must rise to pay for those checks. For similar reasons, wise taxpayers should also spend less upon hearing about government spending increases. So with wise taxpayers it is not obvious that tax rebates or government spending increases would help much with the downturn.
The consensus among macro-economists seems to be that people can in fact be fooled by such stimuli, but as Tyler indicates, it is not clear which policies most fool us. In particular, the more public attention we give to the stimuli, the less they might work. We might make people realize that they need to compensate via saving, and the more we scare folks into thinking we need huge stimuli, the more we might scare them away from normal economic activity levels.
So should we stop explaining macro-economics during this crisis, and stop saying how desperately we need stimuli? After all, similar rationales were offered against allowing financial market short-sales.
Lying Stimuli
You are missing a key ingredient. The money supply. If people were rational there would be no boom bust cycles. The existance of some irrationality is part of the system. What the macroeconomists are saying is that our irrationality is somewhat predictable when it is aggregated and can be manipulated to increase prosperity. This isn't just an argument for stimulus its an argument for having a Fed which adjucsts interest rates. Why shouldn't we try to understand aggregate irrationality and use it to our benefit?
@TGGP
"why Robert Barro thinks you should discount Krugman"
But having read some Barro lately, and having seen Krugman's response, I have to say I am more persuaded by Krugman! I do think Krugman is winning the question honestly with his arguments. Overall my impression is that Paul Kedrosky actually has the most interesting and useful understanding of the situation.
"Is he the only one?"
Of course not. The person with the most amusing ideological view, hands down, is of course Wilkinson. That's because he's one of the most hilarious people I know.
But seriously, this question is too important to leave to ideology, which is why we're all here at OB. Whatever happens now could probably shape the planet for the next 7-10 years, as this is an international problem. The irony in this case is that truth-seeking will require most OB folks - the ones who could be the most helpful in forming views - to refrain from having an opinion. Sigh.