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October 2010 - Posts

  • The Need for a Second Economic Stimulus and the Deficit Problem

    George: The economy is once again moving towards recession. I believe we are going to need a second economic stimulus soon.

    Alice: I think so too, however, I don’t think a new stimulus will be as effective as you think it will.

    George: Why not?

    Alice: Well, in the 1930’s the approach was excellent; Keynes was right. When the government created jobs through fiscal spending the new workers injected money into the system through consumption. That money had a multiplying effect that brought economic growth.

    George: Then why won’t doing the same thing help now?

    Alice: Because at that time when a worker spent their salary they bought American-made goods and, like waves rippling on a lake, that money stimulated other sectors of the economy. The spending of thousands of workers created a large demand for many products which brought about the hiring of more workers who in turn spent their salaries helping to bring the economy back up again.

    George: But you still haven’t told me why we can’t get the same results now?

    Alice: Because now-a-days when workers spend their salaries a large portion goes to China, Japan and other countries that export a large number of products to us.

    We end up stimulating their economies and not our own. That increases our commercial deficit to dangerous levels. We need to find a way to increase our exports to those countries so that our deficit doesn’t continue to grow!
    Posted Oct 13 2010, 03:17 PM by cartoon with no comments
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