Friday, May 25, 2012

How to Un-stimulate Your Economy

Our good liberal friend Paul Krugman travels the world plugging the benefits of Keynesian stimulus.  Of course he does.  He's a liberal and liberals believe in bigger government.  Increase the good things that government is doing and society will be the better for it.  QED.

But the science--leaving aside the magic tricks of John Maynard Keynes in the 1930s--is pretty clear on this, and a new report pulls some recent findings together.  The findings are collected in the final report of the 2020 Tax Commission at  Here are the results in bullet points from Alistair Heath:
  • "[E]very one per cent of GDP rise in government spending reduces private consumption and private investment by 1.9 per cent". Furceri and Sousa, 2011.

  • "[E]very one per cent rise in tax as a share of GDP is associated with a 0.14-0.27 per cent fall in GDP". Johannson et al, 2008.

  • "[O]ptimal public spending share of GDP [is] 30 per cent." Mutascu & Milos, 2009.
Really, this is not rocket science.  Of course government spending is wasteful and reduces prosperity.  It takes money away from some people and gives it to other people.

There is a grain of truth in the Keynesian stimulus cargo cult, and it is this.  In the middle of a financial panic there will be some enterprises with healthy business models that are temporarily embarrassed.  If you lend them money it will help them get over a rough patch.  That is what J.P. Morgan did in the 1907 crash.

Good for J.P. Morgan.  He bailed out corporate America with his own money.  But that is not what Keynesian stimulators do.  They hand out our money to their friends.  They give it to states to stop teacher layoffs.  They give it to their green energy cronies so they can develop uneconomic green products.  They stiff creditors of auto companies so they can give money to overpaid union members.  That is not stimulus; it is politics as usual.

It is telling that these days our liberal friends need an attack dog like Paul Krugman to push the argument for bigger government.  A generation ago liberals had good old sheepdog Paul Samuelson plugging away at his Newsweek column and John Kenneth Galbraith with his pompous best-sellers that told liberals that their brain-dead conventional wisdom was the epitome of intelligent commentary on the other guys' brain-dead conventional wisdom.  Now they need a sharper message and tighter message discipline.

But like the Fram entitlement guy used to say.  You can pay me now, or you can pay me later.

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