Friday, 8 July 2011

Fiscal stimulus doesn't work

There is an interesting piece on Robert Barro in the U.K.'s Telegraph. Barro is reported as saying:

Stimulus packages, when they are needed, should only direct funds to programs that can be justified on their merits.
"The lesson is you want government spending only if the programmes are really worth it in terms of the usual rate of return calculations. The usual kind of calculation, not some Keynesian thing. The fact that it really is worth it to have highways and education. Classic public finance, that's not macroeconomics."
But he said they [stimulus measures] should be delivered through necessary capital projects and tax cuts, to deliver required services and make the economy more efficient.
On the U.S. stimulus package,
Turning to the $600bn (£373bn) to $800bn US package, he added it was "mainly a waste of money". Stimulus programmes, he said, offer little more than "rearranging the timing" of economic growth. "Possibly you could make an argument that it's worth it. But it's going to be a negative-sum thing overall, so you have to think it's a big benefit for boosting the recovery."
On fiscal multipliers,
Mr Barro argued that, taken over the long term, for every £1 spent, the cost to the economy will be more than £1 – creating what he called a negative fiscal multiplier. Orthodox thinking is that current stimulus programmes have a positive multiplier effect by creating growth.

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