The tragedy of the stimulus

So there it is: Mr. Obama is now endorsing a sort of reductionist Keynesianism that argues that any government spending is an economic stimulus. This is so manifestly false that we doubt Mr. Obama really believes it. He has to know that it matters what the government spends the money on, as well as how it is financed. A dollar doled out in jobless benefits may well be spent by the worker who receives it. That $1 of spending will count as economic activity and add to GDP…

Some Democrats claim these transfer payments are stimulating because they go mainly to poor people, who immediately spend the money. Tax cuts for business or for incomes across the board won’t work, they add, because those tax cuts go disproportionately to “the rich,” who will save the money. But a saved $1 doesn’t vanish from the economy, unless it is stuffed into a mattress. It enters the financial system, where it is lent to others; or it is invested in the stock market as capital for businesses; or it is invested in entirely new businesses, which are the real drivers of job creation and prosperity.