On Stimulus, Krugman Feints, Mankiw Parries, Both Miss

J.D. Foster / July 08, 2010

It often happens that flawed theories put into practice expose their internal inconsistencies for all to see before long. We now see this playing out in the case of Keynesian stimulus and the U.S. economy, and the stimulus defenders are at a loss.

By any measure, the Keynesian debt-based stimulus pushed into the economy in recent years has been extraordinary. Typically prescribed in doses of from 1 to 2 percent of the economy, from 2008 to 2009 the federal budget deficit jumped by 6.7 percentage points, yet the unemployment rate is and will likely remain in the upper 9 percent range well into 2011.

As past is prologue, Keynesian pump priming failed, again. And it failed for the simple reason that it is based on the idea that you can take a dollar from your right pocket, transfer the dollar to your left pocket, and then pretend that you have created an additional dollar.

Deficit spending has to be financed, and in financing a budget deficit one of two things has to happen—either fewer funds are available to finance private borrowing, or more funds must be imported from abroad along with more goods and services. Either way, total demand for domestic goods and services doesn’t change; only the composition of demand changes. (more…)