Clayton Christensen’s Advice to the U.S. Government

Question: What’s the best way to stimulate the economy?

Christensen:    My sense is that in many forms of the stimulus are like pushing a string, and so these banks, they took all of these risks and therefore find themselves desperately needing liquidity.  You can push the liquidity into a bank but you cannot push the liquidity out of the bank.  It can only be pulled from the other side.  And in a similar way, you can cut taxes and push that liquidity into consumers banking accounts, but you can’t pull it out the other side.  And one of the dangers in a recession is that the instinct of individuals and the instinct of banks is to hunker down and preserve their own financial viability, not to aggressively spend the money or loan the money.  And so even though in normal situations, you know, like Ronald Reagan showed us that the big tax cut really could stimulate a decade of economic growth, in this kind of a risky situation, I suspect that putting liquidity into banks and putting liquidity into people’s bank accounts through tax cuts, the liquidity is likely to stay there and not get pulled out the other side and generate employment.  And so the kinds of things that are part of the stimulus package where the government actually goes to the other side and uses the money to create employment, so the rebuilding of the infrastructure and things like that is really a great idea, because there is a direct causal link between you spending and people going to work and then they’re going to work their ability to consume.  That’s where I would focus the stimulus money.  I think the other stuff, you may want to do it just because you have to prop up the banks, but you should not do it in the anticipation that it will solve the recession’s troubles.

The Harvard Business School professor says creating jobs is more important than writing checks.

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