Do Larger Federal Budget Deficits Stimulate Spending? Depends on Where the Funding Comes From


In the true spirit of stepping outside the box, today’s OTB is a counterintuitive argument against the concept that fiscal deficits and/or infrastructure spending constitute effective economic stimulus. It comes from Paul Kasriel, who was one of my favorite reads when he was at Northern Trust, and I am glad he continues to write in “retirement.” He always has a way of looking at things from different angles than everybody else does.

Paul is a self-confessed reformed Keynesian. He likens his own longtime tendency to revert to Keynesian macro analysis to the damnable difficulty of fixing a faulty golf grip: “If you start out playing golf with an incorrect grip, you will have a tendency to revert to it on the golf course even after hours of practicing at the driving range with a correct grip.” But as he struggled with his unfortunate tendency over the years, Paul was forever reminded of a question a fellow student asked him when Paul delivered his very first homily on the wonders of Keynesianism to an undergraduate political science class: “Where does the government get the funds to pay for the increased spending or tax cuts?”