Government Spending

Why Stimulus Spending Fails

More spending means more debt and more future taxes.


When revenue shrinks by 1 percent of GDP and spending increases by 51 percent over 10 months, you get a $2.8 trillion deficit. That figure, according to the Congressional Budget Office, is significantly larger than the deficit Uncle Sam accumulated over the first 10 months of 2019. Yet, many in Congress demand that even more spending be enacted in the name of stimulating the economy.

More spending means more debt and more future taxes. That much we know. What we also know is that the calls for sustained spending—in the form of unemployment checks, individual stimulus checks, small-business grants, and payroll tax cuts—which are made regularly in newspapers, political speeches, and partisan punditry, are overblown to stay the least. The idea here is that if Uncle Sam continues paying people to stay home, their consumption will continue, and the economy will grow.

These calls are based explicitly or implicitly on the belief in an all-powerful federal spending multiplier, or the idea that if the government spends one dollar, the economy will grow by more than a dollar.

That's right; the belief is that when the government takes a dollar out of your pocket, puts that dollar through the political process, and decides where to spend it (based on input from special interest groups), the economy will somehow return more money in growth than the money invested, even after Washington bureaucrats take their cut. It's magic! Sadly, these arguments ignore recent empirical evidence that the costs of increased government spending far outweigh the benefits to the economy.

For starters, contrary to the claims of pro-government spending proponents, economists are far from having reached a consensus about the actual return on government spending. While some economists find that a dollar spent by the government generates more of a return than the dollar spent, others find that the return is less than one dollar. And yet others find that if you take into account the future taxes needed to pay for the dollar that's spent, the multiplier is actually negative, and the economy takes a hit.

After reviewing the recent academic literature for the Mercatus Center's publication The Bridge, my colleague Jack Salmon and I found that most of "the empirical literature on fiscal multipliers conducted since then (2009) has found economic multipliers resulting from additional government spending ranging from a lower estimate of around 0.2 to an upper estimate of around 0.9." We go on to explain that in "(p)ulling the results from two dozen academic studies, we calculate an average multiplier at the low end of 0.31 and an average multiplier at the high end of 0.66."

Now, in fairness, there are narrow cases when government spending can stimulate the economy, but for that to happen, the environment in which the spending takes place is important. Work by economists Ethan Ilzetzki, Enrique Mendoza, and Carlos Vegh on the impact of government fiscal stimulus shows that it "depends on key country characteristics, including the level of development, the exchange rate regime, openness to trade, and public indebtedness." Many other economists have found the same. Unfortunately for the proponents of fiscal stimulus, the United States has the features of a country where stimulus by spending does have an impact and, in fact, can have a negative impact on growth.

Making matters worse is the fact that, even if you had a country with little debt and the right environment, implementing the spending correctly is a key to getting a multiplier that's larger than one. As former Treasury Secretary and former Director of the National Economic Council Larry Summers has explained, stimulus spending needs to be timely, targeted, and temporary. Unfortunately, evidence from the last recession shows that it rarely is.

There are always economists, journalists, and pundits willing to assume that this time will be different and government spending will deliver on the promises made on its behalf by pro-spending advocates. Unfortunately, this is wishful thinking. It is also a dangerous game to play. If spending doesn't deliver on the promised economic growth, what it will undoubtedly achieve is more debt. That, sadly, is a scenario where future growth goes up in a puff of smoke.


NEXT: The Upside of a Blackout? People Take Care of Themselves and Each Other

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  1. Why would anyone believe the debt would ever be paid? 75 years of experience tells people they can just keep borrowing

    1. Yup. My taxes still haven’t gone up since the great bank bailouts of a decade ago. Seems like it has to be reckoned with eventually. But “more spending means…….. more taxes. That much we know” hasn’t materialized yet.

      They could keep this shell game going for decades. As long as people buy treasury bonds. All I know is “more taxes” for these assholes to waste is only popular with resentful progs who know it won’t help anything, but just want other people to have less. They suck.

      1. It’s already been decades.

        I expect a crisis someday. And then it will be fixed by the Federal Reserve buying bonds and then making them disappear.

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      2. It’s not taxes, though, it’s inflation. Things cost more, but wages (at least for people on the lower end of the spectrum) don’t grow as much.

        But inflation is largely invisible to the average person.

        1. ^^^BINGO.

        2. Nailed it. Inflation is the silent stealer of wealth, and with COVID they have kicked it into overdrive.

        3. Not only does inflation make things harder to afford for those with lower incomes, it drives appreciation of the assets of those who already have them.

          What gravity is to an avalanche, inflation is to inequality. Somehow the people who claim to be the most dedicated to fighting inequality are the ones who also want to create the most inflation. Is it any wonder they think the system is “rigged”, when the more they get their way policy-wise, the more they exacerbate the problem?

      3. As long as people buy treasury bonds.

        And by people we mean The Fed. The real problem is the interest on the debt. When interest rates are stupid low like they are now, it’s only a “minor” problem. They may be able to manipulate interest rates to this level forever. Even then, if you have enough debt, the interest payment becomes pretty substantial. If interest rates rise, watch out. The interest payment could be half the federal budget or more.

        1. A ten trillion dollar debt at 3 percent interest (like we had not that long ago), is 300 billion dollars. A lot, but in the context of a 4 trillion dollar budget, manageable.

          A 25 trillion dollar debt at 2 percent interest is 500 billion a year. If rates go back up to 4 percent it’s…. One… Trillion…. Dollars…. just to pay back old spending.

      4. Yes, your taxes have gone up. In fact, the government takes two bites at your money…

        The first is taken from your paycheck when you receive it and is in the form of diminished spending value…which is supposed to be one of the virtues of money. This is in addition to the payroll taxes they take. Except they account for the payroll taxes on your paycheck stub. The one I refer to is hidden, but its there.

        The other bite is taken when you store the money, presumably to keep it for future consumption. This happens when you put your money in your pocket, your checking account or your savings account. You can offset this tax bite by investing the money instead of storing it…but that entails exposing it to risks that you may not care to understand.

        The reason most people don’t know this is because they do not understand the difference between the headline inflation that is reported every month by the BLS and the actual inflation that is reported by the Federal Reserve every week. It might alarm you that the actual inflation numbers spiked to about 65% about 3 months ago and are averaging about 16% right now. The numbers for public consumption – the CPI – rose a modest 4/10 of 1%.

        The important thing to remember is that people like you, who think there is no inflation and that your taxes are reasonable, make up the majority of taxpayers in the US. You don’t realize how bent over you are and worse, you don’t realize how bent over your children and grandchildren are. Yes, someday the bill will be paid…once enough people wake up from their stupor and actually think about what’s happening.

      5. I would have no problem with more taxes if it was actually used to pay down the debt, but of course it will just be used for more spending and that’s assuming revenue actually increases.

        Economy bad: “We need stimulus spending!”
        Economy good: “We can afford to spend more now!”

        There is never ever a case where there is any reason or justification to spend less.

        To avoid just complaining, I think one thing we really need is proportional representation and voting, so it’s not always a binary choice and each party can use fear of the other to hang onto their cushy positions.

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    5. Paying the debt hasn’t been the purpose since at least 1836.

      The sole function of taxes is to ensure the public debt can be rolled over. Which means taxes need to pay the carrying costs and that’s it.

      The sole function of the public debt itself is to provide a liquid, risk-free asset that is the base for all the leverage in the economy

      I don’t like the implications of MMT – but at least they understand what money actually is. And that includes both current money and credit money.

      1. Destroying the wealth of people who have earned and saved and accumulated is evil, but at least it’s an ethos?

        1. A straw man in the hand is worth six in the field

      2. If you look at the history of money supply growth, you’ll find that it is can be a better measure of economic activity than GDP itself. If the managing authorities (central banks) and governments play by the MMT rules, that is.

        But how often do managing authorities play by the rules? Almost never. The mismanagement by central authorities create imbalances that cause exchange rates to fluctuate beyond what they normally would. The purpose of the FOREX was to provide a counter-balancing market that punished mismanagement and over consumption while rewarding responsible management and productive effort. So far its done its job, but recent non-capitalist authorities have been raiding it. The springs that keep the FOREX markets ticking away are starting to get wound pretty tight. The non-capitalists are trying to bring the whole thing crashing down so they can complete their “people’s revolution”. They haven’t figured out that if they succeed the capitalists will invent something else…and it’ll probably be harder to crack than the last one. The non-capitalists are a rather dim witted crowd.

        We’re seeing the beginnings of the problem this all creates being sorted out in the currency markets. Fun times…and fascinating to watch!

    6. The US can continue to get away with it because the dollar remains the global currency reserve of choice. We enjoy that status not because our economy is strong but because we are “the best car in the junkyard”.

      That works right up until you’re no longer the least-bad choice. Note that it doesn’t help when your new policies are the equivalent of beating in the doors and smashing out the headlights with a tire iron.

      1. I laugh when people suggest that China is the next “best car in the junkyard”.

        Yeah…right. That would be a “from the pan into the fire” choice.

  2. For someone who is in their late 20s, people on the right will say that the national debt might severely impact them during their lifetime. People on the left say more or less the same thing about climate change.

    But the stossel guy makes videos like ” Don’t Put Too Much Faith in the Experts – There is no such thing as expertise on the future.”

    The stossel guy’s video is only 5 minutes. This leaves plenty of time for napping. The debt is high. Taxes have been reduced recently. This is all present tense. Stossel says that is all we ever have or can know about with any sort of expertise.

    1. For someone who is in their late 20s, people on the right will say that the national debt might severely impact them during their lifetime. People on the left say more or less the same thing about climate change.

      They’ve been saying that since at least the 80s.

      1. Eventually, they will be right.

      2. Exactly. Blah, blah, blah. Just give me more free stuff. Gimme gimme gimme. Make that rich guy pay for it. Or anybody other than me, I don’t care. Where’s my free check? I want it now. The rent is too damn high.

        1. Thanks for demonstrating how detached are Libertarians are from normal people. Who the fuck do you think is really like that? Maybe a pampered ceo or millionaire (replace “make that rich guy pay for it” with “make the government pay for it via corporate welfare”) but not the millions of people struggling in the 3rd world poverty of the United States, shithead.

          1. “3rd world poverty of the United States?” What are you even talking about?

            1. the 30K extra annual pay boost for being laid off thanks to governors shutting down businesses?

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  4. Political Experts, “Stealing your stuff makes the economy grow because then you have to work harder to replace all that stuff we stole.”

    The Non-Political, who produces EVERYTHING, “I can’t believe Ruffles potato chips went from $2.99 to $5.29 overnight!!! This is ridiculous…”

    History, “Stimulus stunts cause hyperinflation EVERY SINGLE TIME because your government cannot print VALUE of which NO-ONE has earned.”

    1. But we have the world’s reserve currency, so those rules don’t apply to us. Money machine goes Brrrrrrrrrrrrrrrrrrrrrrrrrr.
      Burn, baby, burn. [insert evil laugh]

    2. and if the recession/depression is bad enough, the inflation is masked for a while.

  5. Personally, I never bought into the ‘government multiplier’ premise; I think it is faulty. A dollar taken out of the private economy and forcibly redistributed creates friction. Inevitably, the value is eroded by the overhead of government (creating friction).

    I always thought the example of a century ago (1920) was prescient. The decline was just as sharp, and more or less as rapid as what we see today. But the choice then was to cut government spending quite dramatically. The economy came back pretty quickly without the government going crazy with spending.

    The problem is that it takes real fortitude on the part of people (in their expectations of government) and of politicians (in drafting policy responses and subsequent action) to make that happen. That is what we are missing today, the fortitude factor.

    1. Nobody wants to eat their vegetables. It is candy, breakfast, lunch, and dinner.

    2. Friction isn’t the biggest problem when government spends money instead of the private economy, if by friction you mean inefficiency. The biggest problem is the difference in value creation. Government has no incentive to even think about value, never mind implement it. There’s no mechanism, like profit. How many times have you heard politicians talk glowingly about a program because it will create jobs. There is no thought about whether it creates value.

  6. Here’s a radical idea:
    Just call off the “national emergency” and repeal all recently issued executive commands.
    Advice people to wash their hands a lot, stay home if they are sick, and get back to work. If they want to they can wear a mask, or even a “cloth face covering”.

    1. Im confused. How does that help with buying votes?

  7. Eventually you run out of other people’s money. Doesn’t make it less true if we say we’re not socialist.

    1. fortunately when you’re the world’s reserve currency you can just run the printing presses and make more of “other people’s money” (find a new phrase that wasn’t coined by a demented old british twat). kinda throws a wrench into your whole ideology of forced scarcity!!

      1. Until you stop being the world’s reserve currency. Being the world’s reserve currency only happens because people trust your monetary policy. Running the printing presses will ultimately break that trust. There isn’t going to be a warning – when it occurs, the change will be rapid and irreversible.

        Your economics are nonsense, because it forgets that money doesn’t have intrinsic value. Without real value being created, adding more money must decrease the value of that money. In the real world, this leads to devalued (and therefore decreased) savings, decreased capital investment, and a fixation on short term profits over long term growth.

        1. Yep. How many countries are going to sit back and take it in the shorts AGAIN after we just devalued our currency by like $8T? Sooner or later they will be looking for alternatives, and we can’t bomb EVERYBODY into compliance.

  8. We Koch / Reason libertarians know the ideal way to stimulate the economy: open the borders. Fortunately we’re less than half a year away from the Biden Administration doing exactly that.


  9. It’s all fun and games until the feds can’t pay dividends on bonds. Then the gravy train will grind to a sudden and violent stop.

    1. They will just print more money to pay the dividends.

      1. That involves issuing more bonds.

        1. Until they change the rules and it doesn’t any more.

          1. And then other countries divest themselves of dollars, and the value of the dollar plummets. It’ll make the Great Depression look like a fun time.

  10. More spending means more debt and more future taxes. That much we know.

    We also know those taxes will be paid using the Guaranteed Basic Income, right? RIGHT?!

  11. Government spending generally redirects resources from investment to consumption, and that’s bad for productivity and economic growth.

    (Doesn’t matter how it’s paid for.)

  12. “Why Stimulus Spending Fails”

    The incumbent reelection rate in Congress is consistently above 90%. I’d say that stimulus spending is doing exactly what it’s supposed to do.

  13. Sadly, these arguments ignore recent empirical evidence that the costs of increased government spending far outweigh the benefits to the economy.

    Recent? I thought this stuff was largely considered solved in the late 1700s to early 1800s with the death of mercantilism. I thought Bastiat had completely demolished this idea in his treatise on the Seen and the Unseen. When the government takes a dollar from Peter and gives it to Paul to spend, Paul’s dollar may in fact generate more than $1 worth of value to the economy, but it’s not competing against the $1 of value that Paul was given. It’s competing against the potential value of the dollar that Peter could have generated.

    But what if the government simply prints a dollar and gives it to Paul? No need to take from Peter.
    Then any increased value of the dollar must compete with the inflation created by printing the dollar. You can print all the dollars you want but you can’t print value. Value must be created through activity. Thankfully, you don’t need an economic “system” to encourage that. People like having nice things and living nice lives and so just do that on their own and trade amongst themselves for what they can’t produce directly. The populace’s unwillingness to believe these simple facts is why socialism, possibly the worst idea in history, just will not die.

    We were living in trees when they met us. They showed us each in turn
    That Water would certainly wet us, as Fire would certainly burn:
    But we found them lacking in Uplift, Vision and Breadth of Mind,
    So we left them to teach the Gorillas while we followed the March of Mankind.

  14. Revenue is going to shrink by a lot more than one percent.

    People seem to think Congress is sitting on multiple trillions of dollars to bail everyone out with, instead of being multiple dozens of trillions of dollars in debt. All they’re doing is taking out a loan against our future earnings and tax payments. No thanks.

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  16. This is a good article that no one will care about. We use fiscal stimulus far too often, not the 2017 tax cut enacted during a period of a good economy. Even now we should be focusing on fiscal help for those who are unemployed because of the pandemic. Instead there is a hogue pogue of spending planned. Remember 1 person could balance the Federal Budget, 10 people might be able to, but 535 people don’t stand a chance of doing the same.

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