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Sunday, May 31, 2009

The Anti-Stimulus

Arnold Kling, whose writing on health care is fantastic, takes a look at the stimulus package as it's being implemented. Kling aruges that aside from the pork projects and bad decisions, the basic structure of this stimulus package is counter-productive:
As we know, most of the stimulus spending does not take place until next year and beyond, so the short-run gains are puny. On the other hand, the big increase in the projected deficit creates the expectation of higher interest rates, which raises interest rates now. These higher interest rates serve to weaken the economy.

According to this standard analysis, the stimulus is going to hurt GDP now, when we could use the most help. Much of the spending will kick in a year or more from now, with multiplier effects following afterward, when the economy will need little, if any, stimulus.

This is the flaw with using spending rather than tax cuts as a stimulus. The lags are longer when you use spending.

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