Just Say No To Keynesian Leaky Bucket Economics
In the video above, Cato Institute's Dan Mitchell explains why Keynesian economics sounds good but is fundamentally flawed, and why bigger government cannot stimulate the economy. Reason: Before government can inject money/spending into the economy, it first must take money out of the economy (borrow or tax), so the net result can never be anything more than an inefficient redistribution, shifting and transfer of income/spending from one group to another. Kind of like transferring water from Group A to Group B, but with a leaky bucket (see picture below).
As George Mason economist Russ Roberts said on NPR earlier this year:
When you just send out checks from the government (MP: implement a Keynesian stimulus), whoever gets stimulated is likely to be offset by someone who gets unstimulated. The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they'll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn't get any deeper.
That's why stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician's approval rating.