Thursday, December 02, 2010

Why the Spending Stimulus Failed

Yesterday the CBO reported that tax breaks were the least effective portion of the stimulus plan. Now we’re being told that the stimulus failed because it needed more tax breaks? Here’s the thing, we’ll never be able to prove that an economic plan “worked” or didn’t, simply because we can’t know what would have happened had we acted differently. So, at the end of the day, it’s all just speculation, but enjoy some more:

From the Wall Street Journal:

President Obama and congressional leaders meeting yesterday confronted calls for four key fiscal decisions: short-run fiscal stimulus, medium-term fiscal consolidation, and long-run tax and entitlement reform. Mr. Obama wants more spending, especially on infrastructure, and higher tax rates on income, capital gains and dividends (by allowing the lower Bush rates to expire). The intellectual and political left argues that the failed $814 billion stimulus in 2009 wasn't big enough, and that spending control any time soon will derail the economy.

But economic theory, history and statistical studies reveal that more taxes and spending are more likely to harm than help the economy. Those who demand spending control and oppose tax hikes hold the intellectual high ground.

Writing during the Great Depression, John Maynard Keynes argued that "sticky" wages and prices would not fall to clear the market when demand declines, so high unemployment would persist. Government spending produced a "multiplier" to output and income; as each dollar is spent, the recipient spends most of it, and so on. Ditto tax cuts and transfers, but the multiplier is assumed smaller.

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