Saturday 26 January 2008

The foolishness of economic 'stimulus' (updated)

Donald J. Boudreaux has an article in the Christian Science Monitor under the title The foolishness of economic 'stimulus'. In it Boudreaux argues that
... stimulus, however, is futile. Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is newly created.

If it comes from taxes, the value of Jones's stimulus check is offset by the greater taxes paid by Smith, who will then have fewer dollars to spend or invest. If Uncle Sam borrows to pay for the stimulus checks, this borrowing takes money out of the private sector. Any dollars borrowed – whether from foreigners or fellow Americans – for purposes of stimulus would have been spent or invested in other ways were they not loaned to the government.

The only other means of paying for such stimulus is for the Federal Reserve to create new money. Unfortunately, this option leads inevitably to inflation.
Boudreaux's last paragraph makes an important point that we should not lose sight of,
Sound money, low taxes, and free trade might not "stimulate" the economy today, but this combination will surely increase its vigor over the long-run.
And it is economic growth over the longer term that raises our standard of living.

Update: Arnold Kling gives his view on Boudreaux's view in Boudreaux vs. Macro.

3 comments:

Eric Crampton said...

Freudian typing in the update?

Paul Walker said...

Thanks EC, now fixed. Don't you have work to do?????

Eric Crampton said...

Was trawling through yer blog looking for hints as to whence you might have disappeared. You're still posting, so you're still alive...