Do Government Spending and Tax Rebates Stimulate Growth? December 18, 2008

Organizer: Cato Institute. President-elect Obama and other politicians are urging a massive expansion in government spending, ostensibly to help the economy recover. This Keynesian endeavor is supposed to boost growth by “priming the pump” by means of circulating extra money through the economy. Yet the notion that bigger government leads to more growth is theoretically suspect: any money that the government “injects” into the economy with new spending (or tax rebates) must first be borrowed and diverted from private use. The economic pie gets sliced differently, but it is not any bigger. The real-world evidence is similarly unfavorable to Keynesianism.

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