Wednesday, August 17, 2011

Comment To Casey Mulligan's "Exceptions to Keynesian Theory": Limits To Government Stimulus Spending

A comment I posted to "Exceptions to Keynesian Theory" by Casey B. Mulligan on his blog, supply and demand (in that order) and to the NY Times version of the same post:
Interdependent Independent of incentive concerns, there is often failure to look at the marginal effects of stimulus funding.

When someone loses a job, there their consumption does not drop to zero. The unemployed use their own savings, or rely on friends or relatives for some free meals, temporary living quarters or free services such as a washing machine, etc. Part of this consumption is supplied and purchased by others and increases their demand.

Keynesian stimulus, including unemployment insurance, substitutes for other consumption spending funds.

The same is true on state and municipal levels where part, probably most, of local projected spending will substitute federal stimulus funds for local funds.

To the extent that federal stimulus funds acts as substitute funding, there is no demand increase and economic boost from it.

The part of stimulus funds that replaces other spending has a zero multiplier effect on the economy.

When the extra US government stimulus inefficiencies and delays, as compared to the private sector, are considered, parts of stimulus funding can even have a negative economic multiplier.

The failure to look at marginal spending effects, the failure to consider government inefficiency and the negative incentives mentioned in the blog post are the reasons payments such as food stamps, unemployment insurance and other stimulus spending do not create jobs or provide strong economic stimulus. Stimulus spending, inefficiently and often with negative incentives, substitutes one funding source for another, but does not increase the spending above the baseline amount that would occur without stimulus funding.

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