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Subsidizing growth: At the wrong time

It is virtually common knowledge that using fiscal stimulus to speed up the growth of the economy works. There are a couple of typical mechanisms administrations can take to accomplish the objective of fiscal stimulus.

  1. Lower taxes. By lowering taxes you leave consumers with more money in their pockets. The net effect is an increase in the budget deficit.
  2. Some sort of convoluted “drop” of money into the economy. One example of this would be simply giving every citizen $2,500 per year. This accomplishes the same objective as lower taxes. In this case government spending dramatically increases.

These two should cover just about every scenario. Typically these types of stimulus take place during weak economic periods. So, it begs the question: why are we currently using fiscal stimulus? Is it simply to make one administration look better than another? Has there been any discussion regarding the excessive accumulation of debt that fiscal stimulus causes? This is not the first and will not be the last time an administration uses government debt to subsidize growth in the economy. But, remember, high economic growth leads to more dramatic recessions. So, do we really want an overheated economy? I personally prefer slower, more stable economic growth – such as, say, 2% per year.

In Figure 1 below, we see that this is not the first time the US government has used large fiscal stimulus with low inflation. It is the first time in almost 60 years.

Figure 1

Capture 1

And Figure 2 shows that after several years of annual budget deficit improvements, we will be going back to recessionary times.

Figure 2

Capture 2

Categories: Uncategorized

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