Why Economic Stimulus Can’t Work
President Barack Obama returned from the 2010 G20 Summit held in Toronto having failed to convince world leaders that more “economic stimulus” was needed to cure what ails the world’s economies. Walking a seeming tightrope between too much spending and spiraling deficits, on the one hand, and too little spending and economic recession, on the other, world leaders reluctantly agreed to err on the side of fiscal and monetary caution and to halve deficits in three years.
Economist Paul Krugman in response to this decision cautioned that this policy of deficit reduction is a mistake. In his opinion, the world suffers from too little spending, not too much spending. Without further stimulus, he opined, the world is headed for another depression.
Of course, the coronavirus put an end to whatever reluctance the world’s governments and its central banks had about fiscal and monetary “stimulus,” and caution was thrown to the wind. The latest addition to the debt stockpile will be the $1.7 trillion proposed US omnibus government funding bill. We are now all awash in debt and fiat money. With the US inflation rate running north of 8 percent a year and recession (or worse) still hanging over the US economy, we may yet get a recurrence of ’70s style stagflation!
Is this call for more “economic stimulus” sound or just more Keynesian nonsense from statists and their court jesters? Most calls for economic stimulus are based on the so-called multiplier effect.
John Maynard Keynes believed that spending (consumption) was the engine of economic activity. A dollar spent, he opined, would ripple through the economy creating new wealth worth many times the value of the original dollar. He called this the “multiplier effect.”
It is supposed to work something like this:
Joe is given $100. Joe is in the habit of spending 90 percent of his income, saving the rest for a rainy day. Joe buys a new coat for $90. The shop owner Max, from whom he bought
Article from Mises Wire