The Stimulus Boom Is Already Over. Now Comes Stagnation.

(Mises Institute) The United States retail sales and jobless claims weakness, significantly below estimates, coincides with the largest fiscal and monetary stimulus in history. Something is not right when these figures come significantly below estimates in an environment of massive upgrades to gross domestic product (GDP). Why?

The diminishing returns of stimulus plans are very evident. Artificially boosting GDP with large government spending and monetized debt generates a short-term sugar high that is rapidly followed by a sugar low. The alleged positive effects of a $1 trillion stimulus plan fade shortly after three months. I recently had a conversation with Judy Shelton where she mentioned that the recovery would be stronger without this latest massive stimulus package. The economic debacle happened due to lockdowns and the recovery comes from the reopening. We need to let the economy breathe and strengthen, not bloat it.

The diminishing returns of stimulus plans are evident. A $20 trillion fiscal and monetary boost is expected to deliver just a $4 trillion real GDP recovery followed by a rapid return to the historical trend of GDP growth this will likely lead to new record levels of debt, weaker productivity growth and slower job recovery. The pace of global recoveries since 1975, according to the OECD shows a weaker trend.

Deficit spending is mostly devoted to current spending, which leads to an almost negligible potential growth improvement. If any, evidence suggests fiscal multipliers are poor, even negative, in highly indebted and open economies.

We must be cautious of the excess of euphoria that emerges from many statements about the so-called European “Next Generation” funds. Many of the optimistic estimates seem to forget the negligible effect of previous similar plans.

The sharp increase in contributions to the European Union Budget and the tax increases announced by some countries like Spain will likely diminish the net effect of these funds.

All the success or failure of the European Recovery Plan rests on the estimates of the multiplier effect of the investments made. And the prospects are not good if we look at history.

The average impact of the last programs such as the 2009 Employment and Growth Plan, the Juncker Plan or the Green Directives to support investment in renewables has been extremely low. The empirical evidence from the last fifteen years shows a range that, when positive, moves between 0.5 and 1 at most … And in most of the peripheral countries, they have been negative.