“Keynesian Death Spiral”

Jerry O’Driscoll discuses the problem at the ThinkMarkets blog. He writes,

The more powerful one believes fiscal stimulus to be, the more adept the Keynesian policymaker must be. If the stimulus has powerful positive effects when added, it will have powerful negative effects when withdrawn. Hence, the application of stimulus and its withdrawal must be precisely timed. An economist would ask from whence the knowledge to do this would come.

As Hassett notes, however, stimulus has not two but three stages. It may boost growth when added, but must slow growth when withdrawn. The third stage comes when taxes (current or future) must be paid to fund the stimulus. That stage is always negative in its effects. Thus, Hassett concludes that “the total impact of the Keynesian policy is negative over its life.”

But politicians use an aggressive stimulus to avert what they see as near-term distress which has negative effects when removed or has to be paid for so they use another stimulus to avert another near-term set of problems which ..... and the cumulative effect of which can be ruinous.