This is one of the best explanations of the Keynsian view on the Stimulus that I have ever heard. It also tells you why it doesn’t work.
Podcast # 2 – Garret Jones on Stimulus
It is an interview between Russ Roberts (host) and Garret Jones from the Mercatus Center at George Mason University.
Some highlights from the Podcast and the research.
Government spending tends to crowd out private spending. So while the economy may grow as a whole, the private economy actually shrinks. So the % of GDP for government spending rises. This is exactly what we are seeing now.
Also any multiplier for growth for stimulus spending (for the non economists – $1 of spending leads to $1 of GDP would be a multiplier of 1) is less than 1. To justify the last spending bill they used a multiplier of about 1.52.
They also found that the multiplier for tax cuts is much higher than the multiplier for spending. One of the key studies that found this was done by Christina Romer the former chair of Obama’s Council of Economic Advisors.
Lastly and most importantly, they found that it if you are trying to shrink a budget deficit it is much more effective to reduce spending than to increase taxes. When the government spending shrinks, the private economy actually grows.
The podcast is 60 minutes long but the most interesting stuff is in the first 30 minutes and if you listen at double speed like I do it only takes 15 minutes (or so).