There Goes the Stimulus…

A basic tenet of Keynesian Economics is that, in times of recession, governments should cut taxes and/or increase deficit spending. The US government is doing just that right now.

However, and you knew there had to be a however for this to be a story, most state governments have to balance their budgets. In these hard times, that means they have to raise taxes and/or decrease overall spending. That means the requirements of their state budgets are working to cancel out federal fiscal stimuli.

While we’re on the subject, Keynes held that imports are a drain on GDP. When imports decrease, that shows up as a GDP increase, even though it may be indicative of a deeper economic problem, such as a collapse of demand in a nation. GDP in the USA can go higher in the recession due to this and fiscal policies and the economy can still be in the toilet. So if a talking head on the news should start bubbling about an increase in GDP for a quarter, look carefully at how much of that was due to a collapse in demand for foreign goods and unsustainable government overspending.

6 thoughts on “There Goes the Stimulus…

  1. Hugo D. Espiritu

    That just goes to show how GDP is such a poor indicator of a nation’s well-being as you mentioned on GDP RIP vs. Top Gear.

  2. Hugo D. Espiritu

    Why doesn’t balancing the of the state budget coincide with the balancing of the federal budget? Wouldn’t both do the same thing in the same situation, just on a smaller scale for the state.

  3. chanel wan

    We aren’t trying to balance it we are trying to barely make ends meet right now.

  4. deanwebb Post author

    A $1,420,000,000,000 deficit for Fiscal Year 2009 is NOT balancing or making ends meet.

    Are you not paying attention in class?

    GDP = C + I + ***G*** + Xn

    See that G? When all the other GDP numbers are low, a huge amount of G can make up the difference. This is what the US Government is going for. A huge amount of G. No matter what else a huge amount of G does when it’s borrowed, it *will* increase GDP. Right now, that’s the only number folks are looking at when they talk about the possibility of an economic recovery. A debt-fueled GDP number.

  5. chanel wan

    I was paying attention…

    Then what would be the correct solution to this horrific down fall?

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.