Fiscal Stimulus is Buying Trouble

Why government spending hasn't brought the economy around

This week, President Obama had the dubious pleasure of offering a budget with a deficit of more than a trillion dollars. He could have done something more politically attractive: unveil a plan to curb the runaway spending of the Bush years.

But to do that, the president would have had to make a different choice a year ago, by rejecting the $787 billion fiscal stimulus package passed by Congress. Of all the mistakes Obama has made, that now looks like the worst.

It's a big reason he's widely regarded as an old-fashioned, big-government liberal. It's a big reason Republicans have been able to make the public forget their horrendous fiscal record. It's a big reason for the tea parties.

All these might be a tolerable price to pay if the stimulus had provided a crucial shot of adrenaline. But the evidence indicates otherwise.

Early in the administration, Obama's economic advisers issued a prediction: Without a big stimulus, the unemployment rate would rise from 7.2 percent to 9 percent. With it, the rate would peak at 8 percent. We could have the stimulus, or we could have high unemployment.

In reality, we've gotten the worst of both worlds. The stimulus went through, and unemployment went over 10 percent.

Maybe things would be even worse without all that new spending, which is what the administration claims. But if it can't come halfway close to predicting the effect of the stimulus, how can it be so sure it's doing any good?

Last week's official report that the effort created 600,000 jobs certainly didn't prove anything. All the government did was count how many jobs were paid for with stimulus funds.

That ignores the obvious problem. Money the government uses to create jobs is money that can't be used by the private sector to create jobs. But no one in the White House is trying to count jobs that didn't get created as a result of this mass diversion of funds.

You may not be reassured by the reasoning of Earl Devaney, who heads the federal panel that compiled the numbers. "The people who got the money feel this is working," he told The Washington Post. If Devaney wants to send me a check, I might come around too.

The whole idea of the stimulus is that when the government builds roads and bridges, it puts money into the economy, which generates growth. But Stanford economist John Taylor, speaking Monday at a Hoover Institution conference, pointed out something that stimulus supporters have overlooked: Over the past three years, there is no relationship between the amount of government purchases of non-military items and the rate of economic growth. Oops.

The other theory was that putting more money into the hands of consumers would cause them to go out and buy things. The administration pursued this objective with a tax credit that reduced withholding and thus fattened paychecks.

But the evidence for this approach was also badly lacking. In 2008, President Bush tried to strengthen the economy by sending out rebates of up to $600 per taxpayer. As Taylor documents, the amount of cash Americans had at their disposal jumped. But their spending didn't.

He is not the only leading macroeconomist who doubts the efficacy of such measures. But even if you accept the theory behind the Obama plan, you have to wonder about its usefulness in the real world. Timing is everything, and by the time Washington can pass and implement a stimulus, it's usually too late to help.

You want to stimulate the economy when it's in a recession. But only a quarter of the money in the package was spent in the first seven months. Most of it was scheduled for this year and next—which turns out to be long after the economy resumed growing last summer. In the fourth quarter, gross domestic product expanded at a sizzling 5.7 percent rate.

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  • Suki||

    Good Morning reason!

  • .||

    Good Morning, Suki - got any yaki?

  • Suki||

    +1

  • Suki||

    "This president is a real slow learner."
    - Las Vegas Mayor Oscar Goodman (I)

  • ed||

    I loved that quote. Goodman almost said the "r" word (and yes, lefty language cops have now placed "retard" on their banned-words list.)

  • Suki||

    The transcript does not compare to the video.

  • ed||

    Goodman is a corrupt city booster selling gaudy vacation dreams to nitwits and gambling degenerates, but he has balls to call out the Chief like that.

  • Mo||

    Sarah Palin is a lefty language cop?

    http://content.usatoday.com/co.....retarded/1

  • ||

    I like that mayor. He can rebuild you. He has the technology.

  • ||

    Intelligent people knew this a long time ago.

  • TheOtherSomeGuy||

    There are many people who look at the 5.7% increase in GDP with a healthy amount of reservation, mostly because it's based on an increase in factory inventories, which are notoriously fickle.

  • Coeus||

    Applying fiscal stimulus at this point is like using a cattle prod on Usain Bolt. Even with the encouragement, he's not likely to go any faster.
    That's some funny shit.

  • ed||

    The problem is that whatever money the government uses to create jobs is money that can't be used by the private sector to create jobs.

    Not exactly. It isn't a zero-sum equation. Reckless government spending is imperiling our future but it isn't directly picking employers' pockets. But this mad, irresponsible spending spree is a mortgage on all future Americans' lives, certainly.

  • OMG||

    Not directly, no. But most business people will factor into their investment decisions (i) that the massive crapulous spending today means higher taxes tomorrow and (ii) diversion of resources to the public sector means that they need to shift resources and attention away from the private sector toward rent seeking and ass kissing the political class.

    Those are very real impacts that happen today, and are "dead weight" losses to societal wealth.

  • ed||

    Indeed. Government "planners," many of whom have never held a real, private-sector job, regard employers as little more than pawns to be moved about at the government's whim. They're "humans" in the abstract only...we're all just statistics with our very own incomprehensible government website that demonstrates how much Uncle Sam really cares about us.

  • Some Guy||

    He could have done something more politically attractive: unveil a plan to curb the runaway spending of the Bush years.

    Have you ever met an average voter? Sure they'd like someone to say they'll cut spending, but if you suggest actually cutting something then watch out.

    But to do that, the president would have had to make a different choice a year ago, by rejecting the $787 billion fiscal stimulus package passed by Congress. Of all the mistakes Obama has made, that now looks like the worst.

    Nothing is even on the same level as the bailouts. The "stimulus" can get a healthy second worst, but it's not a close second.

  • TheOtherSomeGuy||

    1) Obama voted for the stimulus.

    2) Government spending is government spending. It doesn't matter which party is in power, we're incapable of maintaining this level of spending for any serious length of time.

  • TheOtherSomeGuy||

    Sorry. Obama voted for the *bailouts*, not stimulus. Brain got ahead of my fingers there.

  • Some Guy||

    I'm confused. What part of my statement led you to believe that I was letting Obama off the hook for the bailouts?

    And all government spending isn't equal. In the case of the bailouts, it was a direct attack on what small bit of free-marketness we had in our system. Nobody who got stimulus pork is going to have the capacity or motivation to cause another financial meltdown, but the bailouts were a direct reward for - and a mandate to repeat - what they had done to cause this one.

  • Fatty Bolger||

    Have you ever met an average voter? Sure they'd like someone to say they'll cut spending, but if you suggest actually cutting something then watch out.

    Yeah? I bet a plan to cut federal employment and freeze salaries and benefits would go over quite well. Think we'll see that happen any time soon?

  • ||

    Agreed but the federal payroll is a drop in the bucket compared to Social Security, Medicaid, and Medicare. Try cutting any of those programs and you'll be swarmed by a mob of crazed old people.

  • ||

    Ah, but you'd have to start somewhere, so cutting the number of federal employees, as well as salaries and benefits, would be a good beginning; especially if it began with Congress.

  • Crazed Oldster||

    Having been forced to participate in the Social Security Ponzi Pyramid since the age of 18, I would have gladly opted out up until the day I turned 62 IF all my contributions, and that of my employers, had been returned to me. I'm PO'ed that I was FORCED to participate.

  • Some Guy||

    Yeah? I bet a plan to cut federal employment and freeze salaries and benefits would go over quite well. Think we'll see that happen any time soon?

    I think there are very few districts where that would result in net positive support for a candidate. It way easier to lose someone's vote than to gain it. Look at how wildly successful teachers' unions are.

    That doesn't make it right, just the way it is.

  • ||

    We have “only” ourselves to blame for this mess:

    This quote came from the Czech Republic. Someone has it all figured out. It’s sad that most of the people of the US don’t.

    “The danger to America is not Barack Obama but a citizenry capable of entrusting a man like him with the presidency. It will be easier to limit and undo the follies of an Obama presidency than to restore the necessary common sense and good judgment to a depraved electorate willing to have such a man for their president.

    The problem is much deeper and far more serious than Mr. Obama, who is a mere symptom of what ails us. Blaming the prince of the fools should not blind anyone to the vast confederacy of fools that made him their prince.

    The republic can survive a Barack Obama, who is, after all, merely a fool. It is less likely to survive a multitude of fools such as those who made him their president.”

    Author Unknown

  • bleek obummer||

    If two quarters of good GDP numbers indicates the Great Recession is coming to an end, it is time to cancel the remaining billions of unspent "stimulus" that isn't scheduled even to be spent this year (and mostly wasted I'd say).

    Stop the bleeding now. The special interests have gotten their largess - it is time to do something (anything!) fiscally responsible for the taxpayers.

    As a wise man once said:

    And he said "Let there be debt" and there was debt - massive debt.

  • ||

    I just had a vision. Someone should do a photoshop, morphing Boba Fett into Obama. Name of the merged entity? Why, Boba Debtt, of course.

  • mr simple||

    Actually GDP has little to do with when recessions are said to have started and stopped. Recessions are assigned month stopping and starting dates and GDP is measured by quarter. Recession end dates are based on the coincident indicators, which include: non-agricultural employment, personal income less transfer payments, industrial production and manufacturing and trade sales.

  • mr simple||

    Production is up, but the rest aren't looking that good.

  • Rich||

    no one in the White House is trying to count jobs that didn't get created

    Because, unlike "saved jobs", this concept is entirely nonsensical to them.

  • ||

    Funny. I don't see John or Episiarch in that picture.

  • ||

    No mention of Bastiat here? The problem is not that just that - "Because, unlike "saved jobs", this concept is entirely nonsensical to them." Its more diffcult, saved jobs can be empirically shown whereas jobs never having come into existence can not be. This is why libratarian views are so bad at attaining politcal support.

  • Tman||

    "saved jobs can be empirically shown"

    -to have been what, saved? Then the stimulus didn't do anything for them other than prolong the inevitable. GM received boatloads of cash to prevent thousands upon thousands of layoffs of Auto Union members that were due to be fired because GM has been hemorrhaging money for the last several years because the workers consume too much of the overhead in the production of the car. There were stretches where GM was losing OVER A BILLION DOLLARS A MONTH. They have "jobs banks" where they PAY PEOPLE NOT TO WORK.

    But by golly, those jobs were "saved" -well, until GM eventually puts the finishing touches on its implosion with the Volt, and then these people will be out of work anyways.

    So in the end we will spend over a trillion dollars between both stimulus packages and the unemployment rate has essentially doubled at the same time. Oh, and sooner or later that money runs out and those people will lose their jobs anyways. And now the wealthy people who are capable of creating new jobs have lost half of their net worth in the stock market, and are getting ready to grab their ankles during the next tax season.

    There is only one thing that can be empirically shown in terms of jobs - and even this is questionable- either the employment rate goes up or down. Saved or created is complete bullshit.

    "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

  • Evil Teabagger||

    But, all that you mentioned in the article has nothing to do with Obama's falling poll numbers, right Steve?

  • ||

    He could have also fought against the bailouts during his candidacy. This would have created a stark contrast between him and John McCain. I guess that's asking too much.

  • Gilbert Martin||

    Condensed economic analysis version:

    Keynesean economic theory is bullshit.

  • XYYLibertarian||

    Keynes has a few corollaries to his theory that government spending can stop an economic downturn. If they are true, he's absolutely right. If not, it's just mugging the public to pay off your own side's campaign contributors.

    1) The banks must have lost confidence/liquidity to the point that people are hiding money in mattresses, rather than keeping it in the bank.

    Banks use their customer's money to finance the creation of new/expanding businesses. The lack of financing leaves the private sector unable to create new jobs. By taxing away mattress money, the government gets it moving again.

    2) REALLY (20%+) high levels of unemployment.

    Basically, you need people willing to take any job they can get, even in a totally different field from their area of expertise. At 10%, a lot of people still have hope they can find a nice, indoors, white-collar job. At 20%, people will thank Obama for giving them a latrine diving job.

    3) The money has to be spent on jobs that do not require a lot of training.

    Spending all of the money on I.T. might give us great information systems, but it won't help the mortgage broker or restaurant worker who are out of jobs. Spending it on roads, bridges, power grids and military equipment is a better bet.

    None of these three conditions is met. Banks have money overflowing their coffers. Unemployment is high, but not catastrophic. Stimulus money is being spent on raises for existing government workers. Keynesian stimulus cannot work with this set of circumstances.

    Uncertainty is the problem here. Every-other week, Obama proposes some new, economy-crushing plan. If cap-and-tax doesn't pass, health care or massive tax increases might. Businesses have to plan a few years out. They cannot do that if they have no way of even guessing at the tax and regulatory burden they might face. Why start a business now, rather than waiting a few years for Obama to leave office?

  • ||

    lol, where did you get these 'corollaries'[sic]? (im pretty sure you mean preconditions because corollary means a proposition that follows with little or no proof required from one already proven. ...

    im a keynesian and ive never heard of these preconditions...

    what i have heard of is the zero bound precondition where the central bank is already lending at close to 0% interest.
    this condition is met today

  • ||

    Chicago school economic theory is bullshit.

  • ||

    "Sorry. Obama voted for the *bailouts*, not stimulus. Brain got ahead of my fingers there" - TheOtherSomeGuy

    You mean obama didnt vote present like he normally did?

  • ||

    We have “only” ourselves to blame for this mess:

    This quote came from the Czech Republic. Someone has it all figured out. It’s sad that most of the people of the US don’t.

    “The danger to America is not Barack Obama but a citizenry capable of entrusting a man like him with the presidency. It will be easier to limit and undo the follies of an Obama presidency than to restore the necessary common sense and good judgment to a depraved electorate willing to have such a man for their president.

    The problem is much deeper and far more serious than Mr. Obama, who is a mere symptom of what ails us. Blaming the prince of the fools should not blind anyone to the vast confederacy of fools that made him their prince.

    The republic can survive a Barack Obama, who is, after all, merely a fool. It is less likely to survive a multitude of fools such as those who made him their president.”

    Author Unknown

  • ||

    money the government spends is NOT crowding out the private office!

    the government is lending out money at close to 0%, in other words, it's willing to give the private sector as much money as it needs.
    whatever money the government doesn't spend simply wouldn't get spend and more people would be left unemployed.

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