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Friday, December 06, 2013

Why Government Stimulus Programs Don’t Work

Looking only at consumer spending leads to the Keynesian conclusion that any sort of government spending intervention is as good as the next. 

Hence Keynes’s assertion that paying men to bury bottles and paying others to dig them up is a good use of government funds in a recession.  People employed in such useless labor will be better off than the unemployed, but it does nothing to improve underlying business conditions.  Stimulus spending takes money from one group of people and transfers it to others, either directly by taxing, or indirectly by deficit spending that raises the national debt and places a higher tax burden in the future.  In neither case does it add to the supply of real goods and services that people will buy voluntarily.

The failure of Obama’s $800 billion stimulus to produce the promised 1.5 multiplier effect exemplifies the falsity of Keynesian economic doctrine.

At most, government stimulus spending aiming to increase spending by debt-laden households has very short-term effects.  Businesses may temporarily increase production of inventories, but, as we have seen over the past five years, will remain wary of adding to employment or making new investments in productive equipment and facilities. 

Beyond GDP: Get Ready For A New Way To Measure The Economy


“Spending by business (private investment plus intermediate inputs) is substantially bigger [than consumer spending], representing over 50% of economic activity.  That’s more consistent with economic growth theory, which emphasizes productive saving and investment in technology on the producer side as the drivers of economic growth.

“Consumer spending is largely the effect, not the cause, of prosperity…

While GDP is a good measure of national economic performance, it has a major flaw:  In limiting itself to final output, GDP largely ignores or downplays the “make” economy, that is, the supply chain and intermediate stages of production needed to produce all those finished goods and services…”