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Thursday, May 21, 2009

"Will the Stimulus Stifle Recovery?"

More people tired of hearing criticisms of the economic stimulus package that are wrong due to the "Great Forgetting":

Will stimulus spending stifle recovery?, by James W Dean and Richard G Lipsey, Economists Forum: The enormous stimulus packages hastily put together by governments in most large economies encounter two sorts of criticisms from many conservative economists. Both criticisms are wrong.

The first is that spending will either be hurried and wasteful, or that it won’t come on stream until employment has recovered, and will therefore be inflationary.

The second is that deficit-financed government spending merely replaces spending by consumers and firms dollar for dollar; so-called 100 per cent ‘crowding out’. Critics often fail to point out that these two arguments cannot both be true. If government spending merely replaces private spending dollar for dollar, it does not affect total demand. As a result, it cannot be inflationary. ...[...continue reading...]

On the first point, they conclude that:

To be sure, stimulus programmes should target projects with productive potential. Economies from the US to China are in dire need of new physical and social infrastructure. But even “unproductive” projects are better than none at all if the alternative is to leave labour and capital unemployed.

And if stimulus spending for infrastructure comes into effect after the end of recession, when real resources and financial markets are re-employed, there are adequate monetary tools to contain such pressures. In other words, long-term plans for infrastructure planning can stand on their own merit.

And on the second:

...arguments that deficit-financed stimuli will be crowded out are far-fetched in the extreme...

    Posted by on Thursday, May 21, 2009 at 10:36 AM in Economics, Fiscal Policy | Permalink  TrackBack (0)  Comments (54)


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