December 8, 2008
Stimulating scholarship
By James Wilson

Quote of the Day: "Practical politics consists in ignoring facts." -- Henry Adams

Subject: Stimulating scholarship

The politicians want to stimulate the economy by spending money. But if the politicians don't borrow money and spend it, wouldn't someone else spend it instead?

Of course, part of the complaint is that people are saving now rather than spending. But I can remember when politicians and pundits worried that people were borrowing too much and saving too little.   

It seems that no matter how we poor taxpayers use our money, the politicians and their pet intellectuals always think they have a better idea.

The politicians are operating from the playbook of a dead economist, John Maynard Keynes. Keynes believed that decreases in consumer spending should be compensated for by increases in government spending. He argued that this would moderate economic downturns. But . . .

Is there any evidence for this speculation? Two economists, Andrew Mountford and Harald Uhlig, recently examined the history of Keynesian fiscal stimulus, and reached similar conclusions -- it doesn't seem to work.

  • an unexpected tax cut is the best fiscal policy to stimulate the economy
  • deficit-financed government spending doesn't stimulate the economy very much
  • increased government spending crowds out private investment

In other words, allowing people to spend their own money as they see fit stimulates the economy more than having politicians decide how to spend the money. A previous study by Olivier Blanchard and Roberto Perotti reached a similar conclusion . . .

"We find that both increases in taxes and increases in government spending have a strong negative effect on private investment spending. This effect is consistent with a neoclassical model with distortionary taxes, but more difficult to reconcile with Keynesian theory..." 

Greg Mankiw, of Harvard, responds to these studies as follows: "At the very least, these puzzles should give us reason to pause when using the Keynesian framework for policy analysis."

Who will tell Congress that it's not their job to "stimulate" the economy? Who will tell them that Keynesianism doesn't work, and we don't want it? You can, and should. Use our quick and easy Educate the Powerful System to ask your elected representatives to oppose so-called "economic stimulus" legislation. You can use our "cut spending" campaign for this purpose.

Use your personal comments to cut and paste the information from this Dispatch about the two studies that debunk the usefulness of government stimulus spending.

Thank you for being a part of the growing Downsize DC Army.

Hat tip to Russell Roberts at Cafe Hayek for the lead that led to this Dispatch.

Jim Babka
President, Inc.

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