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?’

This post was published at Mauldin Economics on NOVEMBER 30, 2016.