The second quarter 2009 review and outlook by Hoisington Investment Management Company gives a good overview of the complex monetary chain between Fed actions and the economy. Stuff like money multipliers, velocity of money, and supply curves are discussed.
What was more interesting to me was the cited research that suggests the term “federal stimulus spending” is an oxymoron. The Hoisington outlook states, “Many assume that the act of sending checks from the federal government sector to the private sector helps the economy through so-called spending multipliers.” However, some researchers have found that “the government expenditure multiplier from 1955 to 2006 was negative .01, not statistically different from [zero].” This means “that each $1 increase in government spending reduces private spending by about $1, with no net beneft to GDP. All that is left is a higher level of government debt creating slower economic growth.”
I’m not sure if I am merely seeking to confirm my biases here, but I feel that this is good evidence that there is no multiplier effect from the federal government increasing its debt to “stimulate” the economy. After having correctly intervened to avert a major crisis during the first quarter of this year, the government should allow the private sector to do its thing — the last thing the government should be doing is ratcheting up the debt because the effect is negligible at best and most likely negative for the American people. The only people benefiting from increasing levels of debt are the politicians who are able to hand out favors and bribes to their constituents via government expenditures. President Obama is another one of the few beneficiaries of this crazy policy — I am sure he still has many campaign favors to repay.
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