Monday, November 19, 2012

The Effectiveness of Deficit or Stimulus Spending

Conventional wisdom holds that an industrialized nation facing an economic slide should spend government funds to get money into the hands of those who can spend it on goods and services. This in turn puts other workers back on the payroll and creates a virtuous cycle. This idea is attributed to John Maynard Keynes, although it was undoubtedly bandied about by earlier theorists (just as the idea of evolutionary biology was considered by scientists earlier than Charles Darwin).

Deficit spending worked well in the 1930s but it was actually wartime production (financed by deficit) that ended the Great Depression more than domestic works projects. But if the economic stimulus helped during that period, unfortunately the effectiveness of this kind of measure has been diluted in subsequent recessions. It was used in the early 1980s, the early 1990s and the early 2000s with dubious success. The United States pulled out of each of those recessions but the degree to which we can attribute the recovery to deficit spending is questionable. 

However having said that, I must admit that it is one of very few tools available to government to get us out of the current predicament. The others are so ludicrous that I mention them only to demonstrated the inevitability of the Keynesian approach: printing money and soaking the rich.

The former would only exchange one problem for another. The second is also a non-starter since the rich run our country. I should point out that president Obama advocates increasing taxes on the wealthy and although I agree with his position, the increased income for the Treasury wouldn’t come close to solving our fiscal deficit.

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