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Greg Mankiw has a new editorial in the New York Times onthe stimulus package and the mistaken embrace of Keynesian ideas on fiscal policy.

If you hire your neighbor for $100 to dig a hole in your backyard and then fill it up, and he hires you to do the same in his yard, the government statisticians report that things are improving. The economy has created two jobs, and the G.D.P. rises by $200. But it is unlikely that, having wasted all that time digging and filling, either of you is better off.

One point here is that–unlike what Keynes said–it matters very much what government spends their money on. Part of the reason for this is that research is showing spending multipliers to be only about 0.4. If Government spends $200 for you and me to dig holes, only 8o dollars will then be spent on consumer or investment.

Enough to stimulate new economic activity enough to generate $200 in taxes. Certainly not.


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