At home over Thanksgiving, the state of the economy was on everybody's mind. It's always interesting hearing people express thoughts about economics. Everyone participates in the economy and deals with mortgages and credit scores and student loans, but very few have had formal training in economics. This leads to a distorted or incomplete view of how the economy functions beyond the individual level. For example, when I was talking with some friends on Friday night, they told me they had spent the day "stimulating the economy."

At first I thought this meant they had spent their Friday passing federal spending projects that created jobs and suspended PAYGO provisions in order to inject capital into the economy. Clearly, this wasn't what had happened. I quickly realized that they were talking about their Black Friday shopping.

It is good for those who still have the means to spend money and keep consuming so that the economy does not dry up completely, but I think this idea that all of our holiday shopping this year will be "stimulating" the economy into health is misleading.

"Stimulus" occurs when money that hadn't been flowing in the market is injected, increasing the amount of capital flow. If you go to Best Buy the day after Thanksgiving and drop a week's pay on an LCD television, that is good for the economy, but it is not the sort of focused government spending that can have incredibly effective stimulating effects on the economy. In a recession that looks to be deep and long lasting, revitalizing the economy will take more than a season of marginal increase in consumer spending.

Keynes believed in deficit spending because it was a way of stimulating the economy. Running a deficit is essentially taking money from the future and spending it today. Now, while this is something that would be considered unwise (and possibly immoral) for a person to do, it is not the same for a nation as a whole.

Matt Yglesias put it this way a few months ago in the context of McCain's proposed spending freeze:

"But last, connect the "spending freeze" part of this to the "just like you" part. "You" need to cut back on spending because of the bad times. That means other people will get their hands on less of your money. And then McCain wants the government to also cut back on spending. Meanwhile, state and local government has to cut back on spending. But if consumers cut spending at the same time businesses are reducing investment and state and local government are cutting spending and then the federal government also reduces spending well, then, everyone is going to be spending less and less. Which means everyone is going to be earning less and less. And things are just going to get worse and worse."

The Government needs to spend money right now, because no one else can. Individuals and businesses are cutting back consumption and production, and banks are cutting back lending because they currently have no tolerance for risk that borrowers will default on loans. This is not true of the government, which is able to spend without paying back its debts immediately, and choose to print more or less money.

What really bothers me about people thinking that their Christmas shopping is really stimulating the economy is the way it affects their views of what constitutes stimulus. It's hard to make a case that government needs to borrow money from future prosperity to start rail projects and procure solar photovoltaic cells if people think it's much easier and equally helpful to kick back dividend checks or put a cap on carbon, which effectively taxes an entire sector of the economy.

Stimulus is too important of an economic concept during this current recession for it to be distorted by the media and misunderstood by citizens.