Why stimulus is not working

At least since Keynes conventional economic wisdom has been that the cure for an economic depression is government stimulus spending – even if it means increasing the government debt.  Recently, some people, especially  those who will lose their savings from inflation or if debt has to be written off, have been fighting plans for stimulus spending.

There are other reasons to be leery of stimulus spending.  It isn’t working and it could bring forward an even more serious economic collapse.

To explain this we have to go to the blackboard of an economics classroom where the professor draws an x-shaped graph.  One line represents the financial side of the economy and the other line represents the physical aspect.  The problem is that we measure the physical side in financial terms and tend to forget this distinction as soon as we get away from the blackboard.

polettix_stone_age_wheel_1For stimulus to work there has to be adequate energy and mineral resources to support the increased economic activity.  When Roosevelt implemented the New Deal and when we undertook the Second World War there were still loads of resources.  Now we have used up the most easily accessible energy and minerals.   What’s left requires a lot more work and energy to extract.  Putting more energy into extracting resources is taking away from the standard of living most of us want.

The other problem with stimulus spending is that it will use up even more of the existing resources and make the economic crisis even worse.

If stimulus is going to make things worse, what do we do?  After all people are suffering from the crisis. I think the answer is to drop our commitment to economic growth and the consumer society.  The economic task should be to see that everyone has adequate food, shelter. clothing,  hobbies and entertainment.  It is important to be able to communicate but I’m not certain it is necessary for everyone to have a micro cell phone.


One Response

  1. Nobody seems to understand Keynes. Has anyone read the book?

    For a long time the Americans relied on monetary stimulus (the Fed), and ignored fiscal stimulus. It has now become clear that monetary stimulus is not working one jot. Why? Because the US is in a DEPRESSION, not a RECESSION, and these are, as Keynes pointed out, technically different. One reason is that the USA is in a ‘money trap’. Reducing the interest rate has NO EFFECT WHATSOEVER. Unlike a recession when the lowering interest rates stimulates the economy. Why? Read Keynes for the reasons for a money trap. I haven’t got room here.

    The Fed has been compared to to an economic eunuch. it wants to stimulate the economy, but is incabable of doing it.

    So economic commentators have very belatedly turned to fiscal stimulus. But they still have not read Keynes. NOT ALL GOVERNMENT EXPENDITURE IS A FISCAL STIMULUS. Some Government expenditure, indeed most government expenditure, reduces economic activity in the economy. The ONLY type of government expenditure which stimulates economic activity is ‘HIGH MULTIPLIER’ expenditure, basically capital expenditure on infrastructure.

    Barack, increased social expenditure plus higher taxes will make things worse, sorry to tell you. You must increase government investment and stimulate private investment ONLY. Or the USA, like Japan, will be stuck in this Depression for another ten years. Ten wasted years.

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