A Primer: Why Stimulus Won't Work

The big secret about stimulus spending is that it doesn't always work. Priming the pump is a waste of time when the pump is broken, and our economy is broken. Two Harvard guys explain, starting with liberal economist Jeffrey Sachs.

...we're stagnant at best, and may be entering another recession right now... My view is that we can't have consumption-led growth anymore, we have to really build the foundations of our economies both in the U.S. and Europe.

We have to become more competitive with our new competitors. We have to have better skills, technology, infrastructure. That means an investment-led recovery, quite different from the short-term stimulus.

An investment led recovery would be one in which business is investing in expansion.

Investment led recovery means that firms are investing in new capital. They will employ more workers and reduce unemployment. Investment led growth will increase Aggregate Demand and increase productive capacity. It means that Aggregate Supply will rise. This leads to long term improvements in the economy.

Former IMF Chief Economist and Harvard professor Ken Rogoff confirms that stimulus won't work because because we are in a financial crisis - what he calls the second great contraction - the first one having been the depression.

The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war U.S. recessions have gotten it so wrong.

Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a “Great Recession.” But, in a “Great Contraction,” problem number one is too much debt. If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.

Forget about stimulus. Democrats pursue it not because it will work, but because they want more spending in order to maintain their voters in the manner in which they've become accustomed.