The latest Barron’s includes an extended interview with Stanford University economist John Taylor, who offers the following observations about government stimulus:
My own view is that the [conventional Keynesian] theory is flawed, and the evidence that the fiscal stimulus achieved the desired result is practically nonexistent. The surge in federal spending only increased the burden of the already burdensome federal debt.
Start with the evidence.
The attempt to stimulate consumer spending in 2009, or the earlier attempt under President Bush in ’08, showed the expected rise in consumer income as government payments were made, but little or no response from consumer spending. Inconveniently for the advocates, consumer spending actually declined in some of the calendar quarters when it was supposed to have been stimulated. If you use statistical analysis to take into account the factors that would have brought increases or decreases in consumer spending, you find virtually no boost to spending from the stimulus. …
… It has been argued, however, that the Reagan tax cuts of 1981 were an example of effective fiscal stimulus.
The Reagan tax cuts were not temporary or targeted, which are defining characteristics of discretionary fiscal stimulus packages. The Reagan tax package was meant to be permanent, and a permanent tax cut can certainly influence consumer behavior for the same reason that a temporary tax cut does not.
