Alan Reynolds on The Stimulus and Growth

http://www.futureofcapitalism.com/2009/08/alan-reynolds-on-the-stimulus-and-growth

In today's Wall Street Journal, the Cato Institute's Alan Reynolds tries to debunk the notion that the government spending "stimulus" is responsible for what economic recovery has taken place in America:

Even those who think government borrowing is a free lunch can't possibly believe the government has already done enough "stimulus spending" to explain the difference between depression and recovery.

CNNMoney recently calculated that the stimulus plan has spent just $120 billion—less than 1% of GDP—mostly on temporary tax cuts ($53 billion) and additional Medicaid, food stamps and unemployment benefits. Less than $1 billion has been spent on highway and energy projects. Commitments for the future are much larger, but households and firms can't spend commitments.

I'm as much of a stimulus skeptic as anyone, but the idea that stimulus spending can't have an effect until it is actually spent isn't an idea that I find particularly persuasive. Markets and individuals often operate on the basis of expectations. So some of the stock market decline in the fall of last year, for example, may have been attributable to the expectation that Barack Obama would win the presidency and raise taxes, making stocks less valuable because of higher capital gains taxes. A local government or a solar energy company or a road-and-bridge contractor who knows the stimulus spending is on the way may keep workers employed or invest in equipment, even before the actual federal stimulus check arrives in the mail.

by Editor  |  Aug 21, 2009 at 8:57 am Related Topics:  Stimulus, Taxes receive the latest by email: subscribe to the free futureofcapitalism.com mailing list