Government “Stimulus” Keeps Having a Diminishing Effect
The United States economy recovered at a 6.5 percent annualized rate in the second quarter of 2021, and gross domestic product (GDP) is now above the prepandemic level. This should be viewed as good news until we put it in the context of the largest fiscal and monetary stimulus in recent history.
With the Federal Reserve purchasing $40 billion of mortgage-backed securities (MBS) and $80 billion in Treasurys every month, and the deficit expected to run above $2 trillion, one thing is clear: the diminishing effect of the stimulus is not just staggering, but the increasingly short impact of these programs is alarming.
The GDP figure is even worse considering the expectations. Wall Street expected a GDP growth of 8.5 percent and most analysts had trimmed their expectations in the past months. The vast majority of analysts were sure that real GDP would comfortably beat consensus estimates. It came in massively below.
What is wrong?
In recent times, mainstream economists only discuss the merit of stimulus plans based on the size of the programs. If it is not more than a trillion US dollars it is not even worth discussing. The government continues to announce trillion-dollar packages as if any growth at any cost were acceptable. How much is squandered, what parts are not working, and, more importantly, which ones generate negative returns on the economy are issues that are never discussed. If the eurozone grows slower than the United States, it is always blamed on an allegedly lower size of stimulus plans, even if the reality of figures shows otherwise, as the European Central Bank (ECB) balance sheet is significantly larger than the Fed’s relative to each economy’s GDP and the endless chain of fiscal stimulus plans in the eurozone is well documented.
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