Willy-nilly Spending

Macroeconomics depends upon some simplifying assumptions. Keynesian macroeconomics argues for government stimulus to prod the economy. Keynesian logic appears correct – it’s the assumptions that are bothersome. Greg Mankiw illustrates the problem with a clever example. His bottom line:

If the government spends a fiscal stimulus package on goods and services without much public value …, it could well stimulate the economy as measured by macroeconomic aggregates but leave the participants in the economy worse off … Avoiding this trap requires that the government spend taxpayers dollars only those items that pass a strict cost-benefit test. That is hard to do quickly. Willy-nilly spending is a good way to stimulate the economy only if the outcome is judged by the wrong metric.

Willy-nilly spending seems to describe today’ situation and the next administration’s plans. Watch out below!


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