Monday, January 26, 2009

More to the Point

More to the point of Mr. Quarter's comments in the earlier post "A Few Real Inconvenient Truths", no less prestigious publication than the Wall Street Journal weighs on its opinion page today with the following:

"The stimulus bill is also a time machine in the sense that it's based on an old, and largely discredited, economic theory. As Harvard economist Robert Barro pointed out on these pages last Thursday, the "stimulus" claim is based on something called the Keynesian "multiplier," which is that each $1 of spending the government "injects" into the economy yields 1.5 times that in greater output. There's little evidence to support this theory, but you have to admire its beauty because it assumes the government can create wealth out of thin air. If it were true, the government should spend $10 trillion and we'd all live in paradise.

The problem is that the money for this spending boom has to come from somewhere, which means it is removed from the private sector as higher taxes or borrowing. For every $1 the government "injects," it must take $1 away from someone else -- either in taxes or by issuing a bond [as Mr. quarter pointed out, this bond being purchased by an outside investor, such as China]. In either case this leaves $1 less available for private investment or consumption. Mr. Barro wrote about this way back in 1974 in his classic article, "Are Government Bonds Net Wealth?", in the Journal of Political Economy. Larry Summers and Paul Krugman must have missed it.

The government spending will be a net stimulus only if its $1 goes to more productive purposes than those to which private investors would have put that same There are some ways we may want the government to spend money -- on national defense, say -- but that doesn't mean it's a stimulus."

So, it seems that the developing consensus of more and more "experts" and other commentators is in agreement with Mr. Quarter's assessment. This stimulus plan will not work and will result in the United States being hopelessly in debt.

1 comment:

Anonymous said...

Where's my gun?