Eugene F. Fama, The Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business, puts forward an argument based on three basic assertions.

1. Bailouts and stimulus plans must be financed.

2. If the financing takes the form of additional government debt, the added debt displaces other uses of the funds.

3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.

He argues that as a result of this no additional value is created as investment is just moved from the private sector to government investment or from investment to consumption, with no effect on total current resources in the system or on total employment.

For those who are particularly interested, by following the links through the bottom of the article you will find a countering argument from Paul Krugman of the New York Times, who believes that Fama (and others who have similar opinions to him) has taken a too literal view and has not considered the behavioural relationship. He goes on to argue that this is due to the macroeconomic community currently living in a dark age where they have ‘lost’ this previously held information.

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