The Economic Stimulus Perplex: Could Regulation Be the Problem?

Progressives and the failure of massive government spending to boost jobs and economic growth


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The orthodox Keynesian policy prescription to get out of a recession/depression is for the government to boost demand by massive increases in government spending and borrowing. The idea is that recession-wary consumers are refusing to spend their money thus reducing production and the associated creation of new jobs. In the wake of the Great Recession, the U.S. government enacted the American Recovery and Reinvestment Act (ARRA) to stimulate the economy. Paul Krugman, the modern avatar of Keynesianism, has decried that stimulus as "too small and too short-lived," urging Congress to massively borrow and spend on infrastructure projects. As it happens both major party presidential candidates are in favor of ramping up federal infrastructure spending. In fact, Trump promises to spend twice as much as Clinton.

While considering a new stimulus proposal by the Economic Policy Institute in today's Washington Post, columnist Robert Samuelson cogently wonders why $5.1 trillion in tax cuts and deficit spending between 2009 and 2012 produced such tepid economic growth. As the Great Recession unfolded, he notes that the Chinese were enthusiastic Keynesians spending vast amounts on infrastructure projects. "But it didn't solve China's underlying economic problems, which are now worse for having festered," he notes.

Japan is another Asian country that has tried numerous times to use government deficit spending to jumpstart economic growth. The latest version of this is Abenomics, named after Prime Minister Shinzo Abe whose government has adopted several large stimulus packages aimed at building infrastructure and encouraging consumer spending. The results have been disappointing; the economy grew at 0.2 percent rate in the second quarter of 2016. Abe is doubling down, and has announced a new stimulus package totaling $274 billion dollars.

In his column, Samuelson asks, "What ails the private sector? Can we do anything about it? Those are the crucial questions."

Perhaps the answer to what ails the private sector is excessive regulation. A recent study by the conservative American Action Forum estimates that the Obama administration is on track to adopt over 600 major regulations (those costing more than $100 million each) by the end of the president's term. The total cost of complying with all of the new regulations will add up to $813 billion. The libertarian Competitive Enterprise Institute calculates that extent and cost of Washington's rules and mandates is $1.8 trillion annually, amounting to about $15,000 per household each year. Even the New York Times on Sunday called President Obama, the regulator-in-chief whose new rules have "imposed billions of dollars in new costs on businesses and consumers."

I have reported earlier analyses that found that regulatory drag has made the U.S. economy $4 trillion smaller than it would otherwise have been. That amounts to a lot of foregone jobs and consumption. I would like to suggest that hugely escalating regulatory costs under the Obama administration have mostly offset whatever the benefits that orthodox Keynesians would expect from economic stimulus. In other words, President Obama has been trying to use Keynesian stimulation to rev the economy while simultaneously jamming down hard on the regulatory brakes.

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  1. Time spent shelling out money to jump through hoops is time not making widgets. One pays, the other costs. We don’t need to jamb on the regulatory breaks, we need to take a machete to them.

    Also, doing the same thing over and over again and expecting a different result…

    1. Started working at home! It is by far the best job I have ever had. I just recently purchased a Brand new BMW since getting a check for 25470 dollar this 7-week past. I began this 6 months ago and I am now bringing home at least 97 dollar per hour. I work through this website. Go here…

  2. Thank you, Ron. I needed a break from the election BS.

    1. At least someone has taken up the Dismal Science mantle here at Reason.

  3. Keynes also said that for stimulus to work, it had to be
    1) timely – just as the country was sliding into recession,
    2) targeted – to key industries and geographic areas that would be hardest hit,
    3) temporary – spend when things begin to slide, save and cut when things recover.

    The above mentioned plans are 0 for 3. By the time we realize we’re in recession, it’s too late for stimulus. The payments go to politically favored groups and areas rather than where it is needed. Government programs tend to not go away.

    And I’d love for a real Keynseian to explain why they would actually think the US Gov is actually capable of achieving any of the three, even if you accept the notion that stimulus can work if done properly.

    1. It’s all mental masturbation. No one can “run” an economy as large as the US. The best you can do as let individuals look out for their own best interests.

      1. Bull! If you do that then some people might get more money than others. Use your head.

      2. The best you can do as let individuals look out for their own best interests.

        Hillary is running for ‘Chief Executive of the World’s Largest Economy’ thank you very much. And her Plan, which I saw on an ad last night, is to tax nameless buildings representing Evil Corp. in downtown Manhattan (not Midtown, of course) and build windmills.

        1. Hillary’s plan: Make sure the rich “finally pay their fair share” and charge an “exit tax” on businesses relocating overseas.


          And extra barf on actually using the words “exit tax”.

          1. Why don’t we build a wall to keep them in, nega-trump?

            1. Isn’t an exit tax basically an economic wall to keep people and, in Clinton’s mind, jobs in?

          2. I initially read that as “EVIL tax” and, in my head, it sounded entirely plausible that her ad would call it that.

    2. Exactly. And even then Keynes admitted the theory wasn’t fully formulated.

      Basically, don’t spend to the point you can’t repay it. That’s the part progressives tend to conveniently overlook.

      1. I remember reading a story where Keynes met some government officials, and they were all gung-ho about government spendingon pork barrel projects and claiming it was all good because of Keynesianism. He basically summed it up that he was the least Keynesian guy in the room.

        1. He did open Pandoras box. Even when he says “that a not what I meant or said!” No one up top cares.

    3. The payments go to politically favored groups and areas rather than where it is needed.

      Seems like it’s 1 for 3 considering the structure of the country. If FedGov were to determine the industries and geographic areas that were hardest hit outside the normal political process (which rewards politically favored groups as a matter of design) then we would accuse them of highhandedly implementing unpopular policies.

  4. It amazes me how little traction regulatory reform can get. “unregulated == bad” is just so ingrained in the public consciousness.

    1. I learned regulation is good in my mandated government education.

      1. Unless it is government regulation of teachers. Like trying to establish objective standards of performance.

    2. People would be eating rotten food and washing it down with wastewater before trying to drive their exploding cars through the forest to get to work at the sweatshop if not for government regulations.

      1. It’s usually not even that specific. Just this general assumption that unregulated means that there is nothing stopping bad stuff from happening, and therefore bad stuff will happen. What kind of bad stuff? Beyond what we can even conceive!

        1. Yeah, we’d have to chop all the trees down to heat our homes after the jobs all get shipped to the third world.

      2. Homegrown food is largely unregulated?

      3. Homegrown food is largely unregulated?

        1. Quiet. They’ll hear you.

    3. Ironically, the left’s love affair with regulation represents a practical barrier to their desire for an ever expanding welfare state. FedGov would have way more scratch to throw around on redistribution if they took away the shackles on the economy, both due to the expected growth from such a move and because they could raise income tax rates with far less detriment to the economy as a whole.

    4. Because when regulations fail, statist blame it on lack of regulation, deregulation, etc.

      Remember how Martin Shkreli was able to take advantage of the FDA’s rule requiring drug trials for reviving drugs that had been use safely for years but were approved before the drug trials became mandatory? In statist minds, that wasn’t Shkreli taking advantage of regulation but lack of regulation.

  5. Economic bright spots are where regulators aren’t. The ongoing information revolution and petroleum have been crutches holding up/growing an otherwise moribund economy for basically the 2000’s, as an example.

    With FCC getting in internet business and Carbontology, the Clown regime has poisoned those golden geese as well.

  6. Gosh, if only there was a major-party Presidential candidate who has spoken about the problems of excessive government regulation….

    1. …everyone would have a good laugh and then get on with solving the problems that need solving.

      1. You forgot to throw in the phrase “common sense”.

        That’s how the REALLY SERIOUS folks show that they are totally non-partisan and non- ideological.

  7. The NYTimes link dont work.

    1. We’re probably better off that way.

  8. I fear we’ll never be rid of Keynesianism because its become a way for politicians to directly line their own pockets.

    1. How so? Not questioning that isn’t true. Just would like some ammo to advocates. My thinking is politically connected groups get stimulus which gets donated to politicians who have ways of converting to personal slush fund.

      1. You could go with the fact that when we inject money, the top doesn’t see inflation. We do because by the time anyone would see it, the prices have risen accordingly.

  9. Ouch, first sentence in to the Samuelson piece, and I have a welt from the massive *facepalm*.

    A great mystery of our time ? one that should frame the campaign debate ? is why the economic recovery has been so sluggish.

    Robert, baby. It’s no mystery. It’s no mystery at all. It did exactly what a small few of us predicted it would. Exactly.

  10. Uh, real economist here. The problem is that the Keynes model is simply wrong. ‘Let’s see, if we make stuff more expensive relative to free time people will consume MORE stuff and LESS free time…’???

    Demand curves slope DOWN. It’s not just a suggestion, it’s the LAW.

    ($=profits, p=price of the good sold, w=wage of workers, f()=production function), x=labor used in production, x()=specific amount of labor that optimizes $)

    $ = pf(x(p,w)) – wx

    pf'(x(p,w)) – w == 0


    1. Hey, Shawn — Always good to see some math here.

      *** rising intonation ***

      But what about “black swans”?

      1. Dude! They’re African American swans now.

        1. They’re African American Australian swans now.

    2. The problem is that the Keynes model is simply wrong.

      That’s not the only thing about Keynes that was wrong.

      What’s unfortunate is so few people seem to realize this.

      1. Can you provide some more on Keynes? I admit like above i don’t know much and area I’m weak on.

        1. Here’s a really good breakdown of how Keynes was wrong, that has nothing to do with his formulas, but tend to deal with the “unknowables” of economics.

          Keynes was wrong on a philosophical level. This is because the study of economics and the role of government is not only about sustaining consumption driven booms. Protecting the American consumer is not the highest goal of government. The US constitution never mentioned anything about this. However, it does talk a lot about liberty.
          Keynes misunderstood the role of the market. He was well versed in classical economics, but blinded by his own ideas. For example, when the economy is artificially inflated with a credit boom, the bubble needs to deflate. If it is not allowed to adjust, the cycle is prolonged. Markets perform the important role of helping people economically.
          Keynes was naive because Government is an inefficient way of allocating resources. Government stimulus falls under the influence of special-interest politics. It was a justification for government spending and all things most thinking people do not like about politicians.
          Keynesian economics is forced redistribution of income. Is it the role of the government for to redistribute income on a large scale?

    3. I think you hit submit too early. Would love a less arcane summary. Just look at the blithering idjits posting here.

      1. Yeah… it was complete when I posted it. Half of it disappeared.


        $ = pf(x(p,w)) – wx

        pf'(x(p,w)) – w == 0


        1. Dear Lord, it cut off my post AGAIN. God Damn It…

          Let me see if I can get it to post all the math…

          $ = pf(x(p,w)) – wx

          pf'(x(p,w)) – w == 0


          1. Nope.

            OK, I am C the math from a Reddit post I made. Let’s try typing it out afresh

            $ = pf(x(p,w)) – wx

            pf'(x(p,w)) – w == 0


            1. Well, goddamn….

              It simply will cut off the post in the middle of the second order conditions no matter what.

              That line should be pf”(x) times dx/dw minus 1 is identically equal to zero. Rearrange to isolate dw/dw and the result is necessarily negative (pis positive, f”is negative). You’ll have to do your own math. I am sick of this, so I wont try to recreate my further comments.

  11. Regulation is certainly part of it. Another part of it is that Keynesian economics generally just doesn’t work. John Taylor’s recent work has put the multiplier at less than 1. That is, for every dollar spent, less than a dollar of economic growth is generated. The problem is that Keynes assumes savers and investors are stupid, that they never react to the government’s behavior. It assumes they don’t save more in anticipation of higher taxes and assume that the spending only means real growth.

    1. John Taylor’s recent work has put the multiplier at less than 1

      I suspect John Taylor is wrong. I strongly believe the multiplier is somewhere in the negatives– primarily because it’s difficult to show what didn’t happen because dollars were taken from productive sectors and shuttled into non-productive sectors.

      1. That’s possible. But, given the data available, it’s a pretty good estimate.

  12. I’ve seen any number of budding business owners have their dreams destroyed by regulatory bullshit. Often, the municipal regs are burdensome enough to quash their plans.

    Its absolutely over-regulation, at every level of government.

    And there is zero appetite to do anything about it.

  13. I keep a mounted piece of the original red tape (red twill ribbon) used to bind government documents on my desk. Mine is from the Civil War.

    Pretty cool.

      1. You can get your own right here:…..03446.aspx

  14. I just want to say I’m happy to see this kind of writing at Reason again. It’s the kind of thing that made me bookmark this site roughly a decade ago.

    I would love to see Reason aim for the kind of social issues/economics analysis ratio it had back then. But that would mean getting those millenials off my lawn.

  15. Keynesian economics wouldn’t work even if there were no – or minimal – regulation at all.

    The concept itself is bogus.

    Government spending is nothing more than forced transfer payments. The government didn’t create the wealth it spends. It extracted it by force from those in the private sector who did create it. Whatever economic activity that would have occurred in the private sector with that wealth is thereby cancelled out.

    Keynesian theory is merely a large scale example of Bastiat’s broken window fallacy.

  16. Nothing paves the road to prosperity like intentionally mispricing financial risk and distorting asset markets.

  17. While I am certainly supportive of less regulation, I think the real reason the 2009 stimulus ‘didn’t work’ lies within Keynesian theory itself.

    Boiled down, the theory isn’t that government spending creates more spending. I think it’s more a case of people reacting to a crisis of some kind by hunkering down, refusing to spend and invest money, creating a downward cycle. In theory, government steps in with spending that effectively keeps stores open and people employed until society figures out that the world’s not going to collapse, at which point we sort of get back to spending and investing.

    It breaks down if we don’t think the worst is behind us, if we still think the world’s likely to end. If that’s the case, then we don’t revert back to form, spending and investing, and the stimulus doesn’t do what it’s supposed to do.

    And it gets worse if we think the spending is only making things worse. If we’re worried about big deficits, or government’s propensity to come back and tax us to make up for the spending, then instead of being reassured by the spending, we decide to cut back even more on our spending, then that only accelerates the downward spiral.

    1. It kind of reminds me of “complimentary” medicine.

      When the woo-woo “works”, it gets the credit. Even though statistically, it is equivalent to placebo. When the woo-woo doesn’t work, it should have been done more, earlier, or we just don’t talk about all the people that it didn’t do anything for.

      When society figures out the world isn’t going to end, the market does the fixing, but the Govt gets the credit.
      In the recent years, when Keynes doesn’t “work”, the market gets the blame and we aren’t stimulating enough, even though the truth is, it is govt regulations and misdirecting capital ala “shovel ready” jobs that keeps the economy stagnant.

  18. Beyond regulations that HAVE been enacted it’s the years and years of uncertainty about just how bad the next round will be.

    Business were slow to hire due to questions of what Obamacare regulations would cost in the future for any employee. Possible changes to net neutrality stifled private infrastructure spending. Threatened carbon limits slow down spending on innovations that might actual do something. Threats of dramatically higher minimum wages slows growth today.

    So, beyond ACTUAL compliance costs, businesses get super conservative and take fewer risks in expectation of more in the future.

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