Microeconomics and the Stimulus Package

Christina Romer, the Chair of the White House Council of Economic Advisers, recently spoke at the University of Chicago about the American Recovery and Reinvestment Act, of which she was a principal architect. She laid out in simple terms why she believes the act will work, and what that means.

As part of her discussion she supported the plan's breadth with some basic concepts from microeconomics:

The microeconomic reason is the simple one of diminishing returns or diminishing marginal utility. While all spending provides stimulus, it is obviously important to devote the spending to valuable activities. The short-run aggregate demand effects of government outlays are generally similar across different activities, but the effects on social welfare or on long-run productivity can be quite different. Moreover, these benefits—like the macroeconomic benefits—tend to decline as the government does more of a particular type of spending.

This puts diminishing marginal utility and short-run vs. long-run effects into a context that's more meaningful to me than the textbook examples. Is this a great time to be studying economics or what? :-)