All You Need to Know About the Stimulus in Two Hundred and Fifty Words
1. We will always have business cycles, which end with our without government intervention. In some cases, government discretionary policies speed recovery, but doing nothing is better than the wrong policy. Entitlement programs serve as automatic stabilizers not requiring government action.
2. The average postwar downturn is ten months. The two most severe lasted 16 months, each caused by different factors. In both cases, alarmists warned another great depression was imminent. If history is a guide, recovery will begin in less than a year from now.
3. The Great Depression was caused by money-supply collapse, the interventions of the National Recovery Act, and the Smoot Hawley Tariff. Throughout the current recession, monetary aggregates have continued to expand. Protectionism and government intervention represent the greatest threats to recovery.
4. Major postwar expansions have followed long-term tax cuts (Johnson 106 months, Reagan 58 months, Bush 120 months) not government spending increases.
5. Discretionary spending cannot be put in place on a timely basis. The CBO estimates that only $191 billion of the proposed stimulus can be spent in 2009.
6. Keynesian fiscal policy is based on the assumption of a large multiplier. Most estimates place the multiplier at one or less, meaning the 2009 stimulus would raise GDP one percent or less. The multiplier is small because government spending crowds out private spending and people understand that deficits must be paid for with higher future taxes.
Paul Gregory, Professor of Economics, University of Houston, Research Fellow, Hoover Institution
Author of Essentials of Economics (Addison Wesley)
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