Answering DeLong, Yglesias, and Collender

Brian Riedl / February 23, 2010

My Corner post from last Wednesday — pointing out that government “stimulus” spending does not add new purchasing power to the economy because the government must first borrow that purchasing power out of the economy — caused a stir among liberal bloggers Brad DeLong, Matt Yglesias and Stan Collender. Their posts suggest they likely didn’t actually read the report I linked to — which anticipated and answered their counterarguments.

Brad DeLong predictably relied more on insults than analysis. Eventually, he asserted that my point that government “stimulus” cannot alter short-term demand must be false, since it would also mean that demand (and therefore income and spending) must always be fixed, making economic growth impossible. But this ignores that demand growth can come from sources other than fiscal policy.

Recovering from a recession requires first correcting the imbalances that caused the recession. Thereafter, economic growth is a function of productivity and labor supply. Rather than raising immediate productivity or labor supply, government spending (and tax rebates) typically redistributes existing demand from one group of people to another. This is zero-sum. (more…)