The real mystery is not that stimulus doesn't work, but why anyone would ever expect it to. After Obama signed the compromise bill on December 17, 2010, one of the first things that the Treasury did was to revise its borrowing plans upward to compensate for the reduction in tax revenue that it knew was coming on January 1, 2011. Additional bonds were sold, and extra money was withdrawn from the economy before the payroll tax cut showed up in workers' paychecks. If there was any impact upon demand at all, it was to reduce it.
Fiscal stimulus always works this way - additional bonds must be sold before additional money can be spent or tax cuts implemented. What Keynesian economists miss is that if there are multipliers for government spending, there are also multipliers for bond sales. Because stimulus consists of bond sales followed by spending, the two sets of multipliers cancel each other out - at best. Fiscal stimulus can never produce any net increase in total demand.
Nails for Keynes' Coffin
Fiscal stimulus always works this way - additional bonds must be sold before additional money can be spent or tax cuts implemented. What Keynesian economists miss is that if there are multipliers for government spending, there are also multipliers for bond sales. Because stimulus consists of bond sales followed by spending, the two sets of multipliers cancel each other out - at best. Fiscal stimulus can never produce any net increase in total demand.
Nails for Keynes' Coffin
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