Tuesday, July 20, 2010

Thinking Clearly About Stimulus Spending

image Economics21 has just published a must-read on stimulus related issues.It should be read in its entirety but I’ll try to quickly summarize it, hoping that you’ll go ahead and read it all. Here are their 6 points!

1. They first want us to know and show graphically how much [stimulus] there already is. “The short answer: a lot. Indeed, a non-world-war record.”

2. “Second, stimulus spending doesn’t pay for itself”.

3. “Stimulus spending doesn’t create permanent growth from nothing.”

4. “Even optimistic analyses of stimulus effects suggest that it would require enormous additional deficit spending to effect a qualitative change in the employment environment………. In short, workers will still have a rough time of it even if we render the federal budget still less tenable than it already is.”

5. “Passing a stimulus package typically requires a large surcharge in the form of non-stimulus spending. Government officials are well familiar with the “chalkboard fallacy” – the tendency of those outside the government to recommend policies without accounting for how they will inevitably be distorted in the political process… In other words, in order to receive $604 billion in additional federal fiscal stimulus over 2009-2010, taxpayers will face a surcharge of 43% – to be financed, plus interest, from 2011 onward – for spending wholly unrelated to strengthening the economy today.”

6. “Finally, by far the biggest threat of near-term fiscal austerity comes not from plans to slash federal spending but from the pending expiration of current tax rates.” Those worrying about fiscal austerity are correct in one respect – there actually is a near-term threat that federal policy will have a contractive effect upon the economy. It’s the threat of a massive tax increase.

The article closes with: “There is no easy answer to the question of how much stimulus spending the federal government should engage in when faced with a troubled economy. But policy makers would do well to remember that federal spending and deficits are already at historic levels, and that even these current “stimulus” policies will exact a heavy long-term cost.”

Please read the whole valuable article here…

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