A Second Stimulus Package? Yikes! | Alan Reynolds | Cato Institute: Commentary

A Second Stimulus Package? Yikes! | Alan Reynolds | Cato Institute: Commentary: "'Indian stocks fell 5.8% Monday amid concern the proposed government budget will add to the country's fiscal deficit.'

Investors understand that increased government spending diverts valuable resources away from the private sector and ends up imposing even more demoralizing taxes on labor and capital."

"A major study of 18 large economies by Alberto Alesina of Harvard and three colleagues appeared in the 2002 American Economic Review. This paper, "Fiscal Policy, Profits and Investment" found that the surest way to make economies boom can be through deep cuts in government spending--the exact opposite of the "fiscal stimulus" snake oil.

Ireland, for example, slashed government spending by more than 7% of GDP from 1986 to 1989--nearly as much as the 8.4% of GDP the U.S. spends on Social Security and Medicare combined. The Irish economy suddenly switched from a 0.2% pace of economic growth in the early 1980s to annual real GDP growth of 7.2% from 1989 to 2001. With GDP doubling every decade, government debt dropped from 125% of GDP to less than 40%.

By contrast, Japan spent trillions on Keynesian "stimulus" schemes after 1991, doubling the ratio of national debt to GDP. Amazingly, they are doing it still. Japan's "lost decade" of economic stagnation is now approaching two decades with no end in sight."