The Stimulus Is Already Slowing The Economy

yield curve

Do you think that the steepening yield curve is the result of foreign central banks growing uncertain about how deteriorating fiscal position?

If so, it logically follows that the Barack Obama’s stimulus program — far from getting the economy “moving” again — is already slowing things down.

Arnold Kling: This is all based on a Keynesian type of macro analysis. As we know, most of the stimulus spending does not take place until next year and beyond, so the short-run gains are puny. On the other hand, the big increase in the projected deficit creates the expectation of higher interest rates, which raises interest rates now. These higher interest rates serve to weaken the economy.

According to this standard analysis, the stimulus is going to hurt GDP now, when we could use the most help. Much of the spending will kick in a year or more from now, with multiplier effects following afterward, when the economy will need little, if any, stimulus.

Kling thinks this makes a strong argument for tax cuts, rather than spending, in terms of getting money into the economy now. Read his whole post here >

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