Keynesian stimulus in one sentence

Milton Friedman, Nobel Prize in economics and ...

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We’re not sure why you’re not spending your money, but we don’t like it, so we’re going to spend it for you.

No?  What am I missing?

Unfortunately, when this happens it moves spending from Types 1 through 3 spending, per Milton Friedman, to Type 4 spending.

In Type 1, you spend your money on yourself.  That’s the most carefully spent money.

Type 2 is you spending your money on someone else (e.g. gifts you give).  Type 3 is you spending someone else’s money on you (e.g. you on business travel).  Type 2 and 3 spending isn’t quite as carefully spent as Type 1, but they’re still much better than Type 4.

Type 4 is spending someone elses’ money on someone else (e.g. government spending).  The result of Type 4 spending creates value in the same way receiving a gift of 100 cans of green beans for your pantry creates value, even though you don’t much care for green beans. To be clear it doesn’t.  That destroys value — even if you donate them to a charity (but I won’t get into that now because I might be wrong about that).

And that’s why stimulus doesn’t stimulate.  It ignores why people aren’t spending money (because they’re being careful for some reason) and overrides that with spending that’s not likely to create net value because it’s not carefully spent.

UPDATE: Be sure to read W.E. Heasley’s excellent elaboration on this post at his blog, The Last Embassy, where he also coins Type 5 spending.

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