Question Washington

June 25, 2011

Stimulus Spending, Keynesian Economics and how does it help?

Filed under: Economy — questiondc @ 4:19 pm

Application of Keynesian economic theory as attempted through stimulus spending has been, by all accounts, a disaster.  The promise that without this enormous package of stimulus dollars being pumped into a faltering economy, unemployment would stay below 8% has proved to be false.  Why did the stimulus not do what was promised and why is unemployment above 9%?  Politicians, Economists, Pundits and just about everyone has their take on why and can point to some theory, idea or belief as to the reason.  Let’s ask some questions.

Prior to the Inauguration of Barrack Obama, a report entitled “The Job Impact of The American Recovery and Reinvestment Act” authored by Christina Romer and Jared Bernstein was issued as a support for the President-Elect and his goal of saving or creating  3 Million jobs.  Reading through this report provides an interesting look into the methodology and premises used to justify the approval of a $775 Billion stimulus package.  Here is where my questions start:

  1. How does borrowing money and increasing Government purchasing create long-term job growth in the private sector?
  2. When has the Government ever created a job in the private sector?
  3. What source of revenue does the Government have other than through taxation?
  4. If tax revenue is taken in from the citizens and then distributed back, minus some percentage, how is that different than taking money out of your left pocket and placing it in your right?
  5. If GDP is the market value of goods and services produced, What good or service is produced by the Government that contributes to growth in GDP? (I know the Expenditure Approach calculation includes government spending.

The Expenditure Approach to calculating the GDP does, in fact, include government expenditures but it specifically excludes transfer expenditures.  In other words social security, welfare, unemployment, medicare, and the like are not considered part of the Government spending in the GDP.  Herein lies a big issue with the stimulus creating any increase in GDP and one of the most important question to be asked:  How is an infusion of taxpayer dollars in the form of a Stimulus any different than a transfer expenditure that should be excluded from the GDP calculation? 

 I’m just askin’.

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