Economists Offer Conflicting Views Of The Stimulus

The 2008 winner of the Nobel Prize, Paul Krugman is definitely pro-stimulus:

"So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion."

From Stimulus math (wonkish).

But Brian Riedl of the Heritage Foundation, writing in the Wall Street Journal, says

"But where does government get this money? Congress doesn't have its own stash. Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It's merely redistributed from one group of people to another.

Of course, advocates of stimulus respond that redistributing money from "savers" to "spenders" will lead to additional spending. That assumes that savers store spare cash in their mattresses, thereby removing it from the economy. In reality, nearly all Americans either invest their savings (where it finances business investment) or deposit it in banks (which quickly lend it to others to spend). The money gets spent whether it is initially consumed or saved.

Governments don't create new purchasing power out of thin air. If Congress funds new spending with taxes, it is redistributing existing income. If the money is borrowed from American investors, those investors will have that much less to invest or to spend in the private economy. If the money is borrowed from foreigners, the balance of payments must still balance. That means reducing net exports through exchange-rate adjustments, thereby leaving net spending on the economy unchanged."

That is from Why Spending Stimulus Plans Fail

A professor at Gettysburg College is very critical of Riedl. They say "No, no, NO! F! John Maynard Keynes demonstrated 75 years ago to the satisfaction of economists everywhere that this logic is fatally flawed. Governments can create purchasing power out of thin air when the economy is in recession and there are unemployed workers and other factors of production."

That is from Brian Riedl fails my Intermediate Macroeconomics class.

But Donald J. Boudreaux, Chairman of the Department of Economics at George Mason University, says "Brian Riedl is correct: economic-stimulus packages are economic snake oil."

That is from Dear WSJ: Economic Snake Oil Not Stimulating

No wonder people are confused.