Arnold Kling on the Stimulus

Dr. Kling is a known supporter of the free-market. Even when he gave his talk at the CATO Institute meeting on Capital Hill about healthcare, he made sure to tell the audience his model on how we can reduce cost is not a policy prescription but a business plan. That means he does not believe that the government should mandate it and whatever comes from the free market will satisfy him. He has a recent article that describes the history of economic thought in Macroeconomic policies and a little bit about the stimulus. This from The American:

“The reason that the Democrats want to delay the stimulus is that they want most of the stimulus to take the form of spending increases, which cannot be handled effectively this year. Tax cuts could take effect more quickly, but the Democrats want to hold tax cuts to a minimum.

Textbook Keynesian economics says that a spending increase will stimulate more powerfully than a tax cut, because part of a tax cut will be saved rather than spent. However, this same textbook analysis says that a stimulus now is more powerful than a stimulus that kicks in two years from now. Even though the multiplier for a spending increase may be higher than that for a tax cut that is enacted at the same time, we can be certain that the “multiplier” for a tax cut in 2009 is greater than the multiplier for a spending increase in 2011.

Finally, I have a concern about the “public choice” aspects of the stimulus bill, meaning the political distortions that make it an ineffective stimulus. If the only goal of the bill were to stimulate the economy, then the focus would be on trying to get the largest possible improvement in employment for a given increase in the deficit. A traditional stimulus proposal, going back to the 1960s, is a temporary investment tax credit. With such a credit, the government in effect provides matching funds for firms that undertake investment while the tax credit is in effect (say, through March of 2010). This would lead to spending increases that are a multiple of what the government contributes.”

This proves not even Keynes would agree with this fiscal stimulus even if you assume it works. This is a great article and a must read.

The rest is here.


Published in: on March 4, 2009 at 1:54 pm  Leave a Comment  
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