The concept of Keynesian stimulus is simple. Essentially, the stimulus is based upon the multiplier effect: the GDP is supposed to expand beyond the initial amount of government spending. When the economy reaches a slump, the suggested government solution is to inject funds into the economy in order to receive a multiplied result. J.D. Foster explains why the theory is unsuccessful:
The Keynesian stimulus theory fails for the simple reason that it is only half a theory. It correctly describes how deficit spending can raise the level of demand in part of the economy, and ignores how government borrowing to finance deficit spending automatically reduces demand elsewhere.”
Ultimately, the “benefits” of the stimulus balance out and leave us where we started. This is obvious if we pay attention to October’s unemployment rise. What’s more, we’re left with a larger federal deficit than we started and little to no improvement in the economy. One of my former professors, Paul Kengor, put recent government spending into perspective by comparing Obama’s spending to Reagan’s:
Ronald Reagan increased the deficit by 35 percent in eight years, whereas Barack Obama has increased the deficit by 450 percent in eight weeks. Reagan created an extra $37 billion in annual deficit. Obama has already created an extra $1.4 trillion in annual deficit.”
So if government spending can't provide a truly successful method of economic recovery, then what can? Recent research reveals that tax cuts are a more effective way to increase the GDP than federal spending. In addition to returning to true fiscal responsibility, a proven way to “stimulate” the economy is to let free market forces operate independently of excessive government regulation. That is, allow free individuals and entrepreneurs to stimulate the economy with their own economic activity instead of depending on an unprecedented rate of government spending and increased debt.
Comments
Well, there's two mays (mebbe more) to look at this.
ONE: This isn't the usual too-much-inventory recession, where once the excess is worked off, things start moving up. This one is a debt recession and the only way to clear the debt is to let companies go bankrupt, inflate the currency or produce/export your way out. The govt won't do the first, is trying the do the second and cannot do the third - we've shipped most of our wealth-producing factories overseas.
TWO: The stimulus did NOT fail. It was designed to enrich Democrat party's supporters and designed to undermine what is left of the free market. Much of the money is not spent - they're saving it for funding 2010 elections.
Oatka,
Good points. I, too, agree that the government should have had a hands-off approach regarding bankruptcies. I especially like your second point, too; I suppose I should have specified:
"what the stimulus promised to do."
Thanks for the input.
the stimulus didn't fail, and that is why we are not in A DEPPRESSION!
The initial recession was a direct cause of the democrat controlled congress mandating "innovative and flexible" lending practices, which led to people who could, in no possible way, afford the loans they were being given. I saw this first hand when I sold my house in CA in early 2006. The person who bought it was a bus mechanic on the local Marine Corps base (highest possible salary of $45k a year); how was he able to afford a $570k house? Of course he had no down payment, 100% financed. From keeping in touch with my old neighbors, I found out that within months he was renting out rooms. They had 4 families living in a 1900 sqft home (about 13 people). Of course they were foreclosed on just under two years after they bought it.
These "mandates" by congress are just causing havoc for everyone. Not only is it negatively affecting my investments, but it is also ruining the lives and credit of these families who are being led to believe they can afford these homes.
There was absolutely nothing stimulating about the stimulus. Oatka was correct in stating that it was a direct payoff to democrat supporters. All it did was prolong the recession. Historically, recessions last 6 - 18 months. This one is projected to last for at least another year. Why? Because of the massive debt the new administration has incurred. The mortgage modifications were a joke, almost no one qualified. The only ones who benefited were the democrat cronies (i.e. diane fienstein's husband, the whole chicago political machine...)
I think that obama hates this country so much that he is trying to destroy it, so that his idealistic communist regime can maintain power. This is his "revolution".
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