Quote:
Originally Posted by aceventura3
When I look at the data I don't see government spending or government deficit spending as the driver of our recovery from the depression the depression. I do think there is a clearer connection with money supply growth and economic recovery. I do give government credit for that, however I still hold that deficit spending does not have a lasting positive impact on the economy and that increased taxes or increased inflation cancels any positive impact of deficit spending.
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No one is saying that deficit generate lasting growth. But it is not supposed to. It is supposed to provide some growth in a tight situation.
And while the increase in the money supply had a great deal to do with the recovery, there are two important points:
- we are already at 0% fed rates. This is a liquidity trap, additional money will not help. Only fiscal stimulus will.
- You seem to be holding on to what in the 1920s was called the treasury view. I.e., one dollar in deficit today means an proportionally equal increase in taxes tomorrow.
But this is not the case, because of three variables: the multiplier, the velocity of money circulation, and interest rates. So in other words, spending today will increase the velocity of the circulation of money. As long as the multiplier is not zero or negative, then we are talking about that dollar generating additional growth. So that dollar you spend today becomes that dollar + whatever growth you have tomorrow. As long as that dollar today + interest rates are not more than that, you are paying back proportionally less than what you spent.
Now, this means that in situations when you have a growing economy, deficit spending simply will crowd out private investment. This is true and this took place during the Bush years, which is why I think anyone concerned with fiscal discipline should have said something 4 years ago, not now.
But all of this also means that in situations where the economy is tanking, and interest rates are very low and the economy is still falling, any deficit spending will have a net positive effect. In a economy where tbond yields are close to 0%, and where the fed rate is 0%, government spending is not crowding out private spending. Any growth the govt. spending generates, even if temporary and very, very small, means that the one dollar they are spending today will be repaid by less than a dollar tomorrow.