James Pethokoukis

Politics and policy from inside Washington

ECB study casts doubt on wisdom of more stimulus

July 20, 2010

The EU’s central bank argues against spending more government cash (via taxpayers) to boost economies:

Finally, our results indicate that rising government debt is the main reason for declining spending multipliers at longer horizons, and thus increasingly negative long-run consequences of fiscal expansions. In the spirit of Giavazzi and Pagano (1990) and Giavazzi, Jappelli, and Pagano (2000), we interpret this finding as an indication that further accumulating debt after a spending shock leads to rising concerns on the sustainability of public finances. In this context, agents may expect larger fiscal consolidation in the future which, in turn, depresses private demand and output.

Me: The study also found that each $1 of government stimulus spending only produces 50 cents of GDP growth.

Comments

“In this context, agents may expect larger fiscal consolidation in the future which, in turn, depresses private demand and output.” – that is ‘Bankese’ for War. If nations go bankrupt and cannot provide the simple services that citizens have come to expect then people will expect more from the government – not less. The only thing left will be nationalist rhetoric, armaments and final expenditure in battle and death. The part about ‘larger fiscal consolidation’ is, of course, conquering other nations and absorbing their governments while ‘depresses private demand and output’ clearly refers to the destruction of the means of production on a large scale which depresses output and, of course, the deaths of many people – which would logically depress demand for as long as they are dead.

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