Tuesday, November 15, 2011

Do I believe in stimulus?

In this day and age of scary big budget deficits, some governments (like NH) have reacted by cutting government spending. Others (like CA, USofA and Greece) have not. Each time a thrifty government cuts spending a whole bunch of pundits pipe up and say "Reducing government spending reduces economic stimulus and casts us deeper into Great Depressions 2.0". Is this really true?
The pundits have all been brought up on Dr. Maynard Keynes, British economist from Great Depression I. Keynes claimed that the Great Depression was caused by a "failure of demand" and the proper role of government was to create demand by spending money, and if necessary, printing it in order to spend it. This theory is attractive to politicians (who love spending money), business (who receives this largess), and liberals.
But does it work in the real world? Certainly Obama's $1 trillion porkulus bill didn't do much for Great Depression 2.0. Keynesian spending requires money that has to come from somewhere, either out of taxes, or inflation (which takes money out of everyone's hide). Could it be that taking all that money away from taxpayers reduces those taxpayer's ability to spend?

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