The New York Times today published a piece on 2/17 by Professor Edward L Glaeser of Harvard University entitled "If you got Money, Now is the Time to Spend Some."

The major thesis of the Glaeser piece is:

"Those Americans who borrowed too much, or are near their financial limits, should certainly cut back. … Yet there are many Americans who spent the last eight years living within their means, and have plenty of resources left. For those Americans, the ones with cash in their bank accounts, this is the time to spend. "

So what does the good professor suggest those with money do to stimulate the economy?

One suggestion is to "…buy new Cadillacs. Each car [bought] will mean a little less bailout money that we'll have to come up with."

Note that the professor from Harvard suggests that we encourage GM to continue to build lots of their energy profligate cars.

Glaeser didn't suggest that "those with money" buy millions of energy efficient cars from GM, Ford or Chrysler that will save us gas and create new jobs in gas efficiency technology. No, we are to buy gas guzzlers so Congress will spend less bailout money on a company got into its own financial crisis by making cars no one wanted to buy.

The good professor also suggests that, to stimulate the economy, those with money:

"Buy things that are private and enjoy them as much as possible within a close circle of equally fortunate friends. This would be a great time to redo your master bathroom."

Unless your "close circle of equally fortunate friends" really, really want to delight in your new Greek marble sinks, French toilets, and Italian faucets, your bathroom remodel to stimulate the economy can probably wait. (And, of course, you can always remind your fortunate friends that you would only be enriching the economies of those countries.)

Perhaps one should ask why the Professor didn't suggest that people with money spend in such a way to support the local companies that sell the things people need, because many of those companies are on the edge of disappearing forever. Sure, the marble counter top sellers need help too, but so does your corner store, your locally owned furniture store, and the charitable organizations in your community that help the people who are direly affected by the recession.

Professor Glaeser's other suggestion on how people with money to spend can turn the country around:

"consider becoming a more generous gift-giver. I am sure that your children, spouse, boyfriend, girlfriend, pet, has done something good that deserves a gift. Valentine's Day was a great chance to splurge, but heck, what about a good round of Easter and Passover presents. April Fool's Day calls for a round of humorous gifts, and May Day for a gift celebrating either spring or the Haymarket riot, depending on your political proclivities."

Our good Harvard professor would have "those with money" get the economy back on track through buying friends gifts on odd events. Regrettably, the economy will not turn around with the purchase of trinkets or iPods but with the continuous purchase of that our fellow Americans make or sell. Gifting a pair of earrings will stimulate the economy?

What our good, highly educated, highly paid Harvard Professor is suggesting is like putting a child's band-aid on an amputated leg. And what our Harvard Professor failed to talk about is that our national financial crisis occurred not because we have failed to buy gas guzzlers or iPods or earrings or toilet seats but because we have a banking liquidity crisis in this country not seen since the Great depression.

Banks simply do not trust those who want to borrow money.

Corporations and local businesses cannot obtain from banks the short and long term loans they need to buy the inventory and equipment to stay in business and to compete.

Most of the banks that received the first round of TARP money simply sat on it; they did not lend it out. Some banks also raised credit card fees and reduced credit limits for the very people who needed to use their cards, either those laid off, on part-time, or small businesses who use credit cards for inventory purchase.

One possible, and I stress possible reason the good Professor is off base is because he earned his PhD from the Department of Economics of the University of Chicago, a department where many professors espouse a theory termed the Chicago School of Economics . This theory eschews Keynesian Economics in favor of neoclassical economics. Three tenents of neoclassical economics are:

1. People have rational preferences among outcomes that can be identified and associated with a value.
2. Individuals maximize utility and firms maximize profits.
3. People act independently on the basis of full and relevant information.

The exponential explosion in the stock market since 1996 and in housing prices since 2002 were fostered by one tennet of neoclassical economics, the belief in unregulated markets and that "full and relevant information "was available to people in the market (housing or stock).

However, as we have seen, those beliefs was far from the truth. With deregulation came 1) mortgage agents who falsified financial data for applicants, 2) mortgage companies which did little oversight of agents and which sold off mortgages in dubious financial instruments called derivatives created by investment banks (financial instruments of which no one knew the true value), and 3) firms like GM which had a concern with maximizing short term profit by selling gas guzzlers instead of building the foundation for long term profits by designing gas stingy cars.

The bane of the Chicago School of Economics is Keynesian Economics, named after economist John Maynard Keynes. This theory holds that individuals and firms can make "micro-level" decisions that result in "aggregate macroeconomic outcomes in which the economy operates below its potential output and growth." This is a perfect description of how we got to this recession.

A key element in Keynesian Economics is that a national depression can be turned around through 1) a lowering of interest rates which leads to more lending to more borrowing and to investment in industrial output, and 2) government investment in infrastructure that stimulates greater spending in the country's economy.

TARP, the new the $2.5 trillion Geithner plan to straighten out the banking/lending mess, and the $787 Billion stimulus plan are examples of Keynesian Economics. These actions are more likely to stimulate the nation's $14.3 trillion annual economy than is having "those with money" remodel a bathroom, gift an iPod, or buy a gas guzzler. Serious public consumption must follow the stimulus actions once the funds start to flow,

Perhaps the New York Times needs to read the economic pieces before they run.

(Full disclosure, I received my PhD in the same academic division as Glaeser, although not the same department (and 30 years before him). Graduate study at the University of Chicago allows students to interact fully in most divisional activities, and in the 70s, I had the opportunity to listen to, understand, and discuss ideas with many of the greats of the Chicago School of Economics such as Gary Becker, Robert Lucas, George Stigler, T. W. Schultz, Robert Fogel, and, to a much lesser extent, Milton Friedman (who had a lower opinion of students from outside his department.))

Peter B. Hayward

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