Woodhill on Why Stimuli Fail

I've never heard of Louis Woodhill before. But, he's given me a rare pleasure. It's very unusual to read an article that exposes an error so accurately, simply, and thoroughly. Here's an excerpt.

The very first step in every “stimulus” program is for the government to go out into the market and sell bonds.

When the government sells bonds, it takes money—and therefore demand—out of the economy. Then, some time later, the government puts the money back into the economy in the form of spending or tax rebates or whatever. Later, when the data becomes available, economists are shocked, shocked to find that “consumers saved their rebates” or “business investment fell by an unexpected amount”, or “imports increased”, thus completely negating the “stimulus”. Their hopes dashed, but their belief in “stimulus” unshaken, the stimulunatics then call for more “stimulus”.

The fact is that for the government to be able to sell the bonds in the first place, consumers have to save, or businesses have reduce their investments, or foreigners have to sell more in the U.S. Otherwise, where would the dollars to buy the bonds come from?

“Wait!” the stimulunatics cry. “What if the Federal Reserve buys the bonds with newly-created money? Won’t that increase demand?”

The answer is, “Sure—but then you don’t need the ‘stimulus’ program.”

The Keynesians who object in the comments are equally interesting.


Update:

Peter Creswell at Not PC has an extended commentary that adds meat to the subject.