The Economic Stimulus Perplex: Could Regulation Be the Problem?
Progressives and the failure of massive government spending to boost jobs and economic growth
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.