July 21, 2017

The Trouble with Keynesian Stimulus Spending

  • Tony Caporale

    Professor and Chairman, University of Dayton Department of Economics & Finance
  • Marc Poitras

    Associate Professor, University of Dayton Department of Economics & Finance
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Some economists argue that the government should increase spending during a depression in order to boost the economy. They believe that the government can use a multiplier formula to calculate the amount by which to increase spending. Even wasteful government spending can be desirable, they insist, since any spending is better than nothing. This notion is flawed.

Tony Caporale and Marc Poitras argue that this approach to government spending fails to account for several significant sources of cost. Besides the cost of waste inherent in government spending, financing the spending requires taxation, which reduces output by reducing the incentive to work. Furthermore, the employment of even previously idle resources involves lost opportunities to invest in alternative uses of these resources. The authors come to the following conclusions:

  • Waste and other costs can negate the benefits of stimulus spending, even in an ideal Keynesian situation (a deep recession with 0% interest rates).
  • Pressuring the government to spend quickly while “the economy is reeling” will result in the government not spending wisely.
  • How the government spends stimulus money does matter. The government should spend taxpayer money carefully on projects that offer real value to the public. There is no justification for spending for spending’s sake, even during a deep recession.