I don’t understand the “Stimulus is Winding Down” argument

Kevin Hasset said, “It is no coincidence that the private sector is taking off while the government stimulus is winding down.” But the reason stimulus is so bad for the economy, according to anti-Keynesians, isn’t the spending per se, it’s the taxing and the borrowing. And as far as I know, taxes haven’t been lowered in response to the winding down and we still have to pay back all of the money we borrowed.

So, if you, dear reader, believe that the recent growth in the economy is due to the winding down of stimulus spending, what aspect of that winding down is spurring the growth? I’m not being rhetorical, I’m really asking.

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2 Comments

  1. I share your skepticism about this argument. The belief is that during a stimulus, government money “crowds out” private investment because the money has to come from somewhere – either from higher taxes or increased government borrowing. Increased taxes result in lower after tax income, so Americans would spend less (this hasn’t happened yet). Increased government borrowing tends to raise interest rates (but interest rates are still at historical lows). Increased interest rates certainly raise the cost of private investment, but the American economy has not seen this cost as of yet.

    So, to argue that the economy is recovery because the stimulus is over is not a good one, because the evidence simply does not support that conclusion. And I say that as a Republican.

    I think the economy is recovering because of simple demographics. For instance, the population is still increasing and people eventually still need to buy new cars after 5 years of buying none, for instance.

    Reply
    • bnmng

       /  2012 March 12th

      Even durable goods eventually have to be replaced. That’s a good point. Thank you.

      Reply

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