Please turn on JavaScript

Brooks Wilson's Economics Blog: The Stimulus, Crowding Out and Growth

Monday, March 29, 2010

The Stimulus, Crowding Out and Growth

The stimulus (The American Recovery and Reinvestment Act) was sold as a necessary government intervention to restore employment and economic activity.  Such Keynesian plans are fraught with problems including bad timing, spending for political gain, bad economic investments, and permanent increases in the deficit. 

De Rugy (Veronique de Rugy, "Politics: Democrats Stimulus Haul Is Almost Double Republicans") finds that stimulus spending in Democratic districts ($471,533,539) is nearly twice spending in Republican districts ($260,675,663) and that there is no relationship between spending in a district and the unemployment rate in a district.

The stimulus could permanently increase deficits and the national debt and many economists believe that larger permanent debt could raise interest rates for all borrowers both public and private.  The rise in interest rates lowers private investment a phenomenon known as crowding out.  Last week's Treasury three offerings that totaled $118 billion were met with weak demand and interest rates rose.  Both the Wall Street Journal ("Debt Fears Send Rates Up") and the Financial Times ("Supply fears start to hit Treasuries") noted that U.S. Treasuries had yields above that of high quality corporate bonds. 

One week's data does not constitute a trend, but, as James Hamilton suggests ("Interest rates spike up"), the bond market bears watching.  He also offers a rosier explanation based on the simultaneous increase in stock prices and interest rates.  Perhaps investors believe that the economy is improving.  Being an optimist, I like the explanation that the private economy is improving but I worry about rise in Treasury yields compared to corporate bonds and that the poor financial condition of the federal government will limit private sector growth.   
Permanent link

No comments:

Post a Comment