Fiscal stimulus packages, such as the one discussed by US President-elect Barack Obama on 6 December, aren’t necessarily economically stimulating because they must be financed. Stimulus works best when the money is carefully directed and the cost doesn’t add to a large budget deficit. If it crowds out private investment, such stimulus will produce higher unemployment, faster inflation or both.

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Occasionally, stimulus may produce more growth than it destroys. The Tennessee Valley Authority power projects made electricity available in areas the private sector would have ignored, and together with agricultural education programmes, created regional economic growth. But examples today of new large-scale infrastructure projects are scarce. Fiscal stimulus risks prolonging a recession and making recovery sluggish. It should be used with great caution.