Donnerstag, 26. März 2009

Fiscal Stimuli

According to Tyler Cowen (Marginal Revolution), German reunification proves that fiscal stimuli are useless or even harmful.

The argument goes like this: German reunification was a huge fiscal stimulus for the West, but the West actually underperformed compared to other European countries in subsequent years, therefore fiscal stimuli are harmful.

What a comparison! He conveniently forgets that

1. A fiscal stimulus spent on yourself is different from a fiscal stimulus spent on somebody else (West Germans paying for East Germans). If you spend money on yourself, you either get additional utility from consumption, or future production capacity from spending on infrastructure, human capital, etc.). If you spend money on others, you get "demand", but to fulfill the additional demand, you essentially have to work for free.

2. West Germany wasn't exactly in a terrible recession at the time, so of course there was crowding out. In particular, there was crowding out with respect to public spending, which got redirected eastwards, and was sorely lacking in the West for many years.

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