Why the Stimulus Failed
Fiscal policy cannot exnihilate new demand
Conservatives have correctly declared President Obamas $787 billion
stimulus a flop. In a January report, White House economists
predicted the bill would create (not merely save) 3.3 million jobs.
Since then, 2.8 million jobs have been lost, pushing unemployment
toward 10 percent.
Yet few have explained correctly why the stimulus failed. By blaming
the slow pace of stimulus spending (even though its ahead of
schedule), many conservatives have accepted the premise that
government spending stimulates the economy. Their thinking implies
that we should have spent much more by now.
History proves otherwise. In 1939, after a doubling of federal
spending failed to relieve the Great Depression, Treasury Secretary
Henry Morgenthau said that we have tried spending money. We are
spending more than we have ever spent before and it does not work. . .
. After eight years of this administration we have just as much
unemployment as when we started . . . and an enormous debt to boot!
Japan made the same mistake in the 1990s (building the largest
government debt in the industrial world), and the United States is
making it today.
This repeated failure has nothing to do with the pace or type of
spending. Rather, the problem is found in the oft-repeated Keynesian
myth that deficit spending injects new dollars into the economy,
thereby increasing demand and spurring economic growth. According to
this theory, government spending adds money to the economy, taxes
remove money, and the budget deficit represents net new dollars
injected. Therefore, it scarcely matters how the dollars are spent.
John Maynard Keynes famously asserted that a government program paying
people to dig and then refill ditches would provide new income for
those workers to spend and circulate through the economy, creating
even more jobs and income. Today, lawmakers cling to estimates by Mark
Zandi of Economy.com that on average, $1 in new deficit spending
expands the economy by roughly $1.50.
If that were true, the record $1.6 trillion in deficit spending over
the past fiscal year would have already overheated the economy. Yet
despite this spending, which is equal to fully 9 percent of GDP, the
economy is expected to shrink by at least 3 percent this fiscal year.
If the spending constitutes an injection of new money into the
economy, we may conclude that, without it, the economy would contract
12 percent hardly a plausible claim.
If $1.6 trillion in deficit spending failed to slow the economys
slide, theres no reason to believe that adding $185 billion the
2009 portion of the stimulus bill will suddenly do the trick. But if
budget deficits of nearly $2 trillion are insufficient stimulus, how
much would be enough? $3 trillion? $4 trillion?
This is no longer a theoretical exercise. The idea that increased
deficit spending can cure recessions has been tested, and it has
failed. If growing the economy were as simple as expanding government
spending and deficits, then Italy, France, and Germany would be the
global economic kings. And there would be no reason to stop at $787
billion: Congress could guarantee unlimited prosperity by endlessly
borrowing and spending trillions of dollars.
The simple reason government spending fails to end recessions is that
Congress does not have a vault of money waiting to be distributed.
Every dollar Congress injects into the economy must first be taxed
or borrowed out of the economy. No new income, and therefore no new
demand, is created. They are merely redistributed from one group of
people to another. Congress cannot create new purchasing power out of
This is intuitively clear in the case of funding new spending with new
taxes. Yet funding new spending with new borrowing is also pure
redistribution, since the investors who lend Washington the money will
have that much less to invest in the economy. The fact that borrowed
funds (unlike taxes) must later be repaid by the government makes them
no less of a zero-sum transfer today.
Even during recessions when total production falls, leaving people
with less income to spend Congress cannot create new demand and
income. Any government spending that increases production at factories
and puts unemployed individuals to work will be financed by removing
funds (and thus idling resources) elsewhere in the economy. This is
true whether the unemployment rate is 5 percent or 50 percent.
For example, many lawmakers claim that every $1 billion in highway
stimulus will create 47,576 new construction jobs. But Congress must
first borrow that $1 billion out of the private economy, which will
then lose a roughly equivalent number of jobs. As
transportation-policy expert Ronald Utt has explained, the only way
that $1 billion of new highway spending can create 47,576 new jobs is
if the $1 billion appears out of nowhere as if it were manna from
heaven. Removing water from one end of a swimming pool and dumping it
in the other end will not raise the overall water level. Similarly,
moving dollars from one part of the economy to the other will not
expand the economy. Not even in the short run.
Consider a simpler example. Under normal circumstances, a family might
put its $1,000 savings in a certificate of deposit at the local bank.
The bank would then lend that $1,000 to the local hardware store. This
would have the effect of recycling that spending around the town,
supporting local jobs. Now suppose that, induced by an offer of higher
interest rates, the family instead buys a $1,000 government bond that
funds the stimulus bill. Washington spends that $1,000 in a different
town, creating jobs there instead. The stimulus bill has changed only
the location of the spending.
The mistaken view of fiscal stimulus persists because we can easily
see the people put to work with government funds. We dont see the
jobs that would have been created elsewhere in the economy with those
same dollars had they not been lent to Washington.
In his 1848 essay What Is Seen and What Is Not Seen, French
economist Frédéric Bastiat termed this the broken window fallacy, in
reference to a local myth that breaking windows would stimulate the
economy by creating window-repair jobs. Today, the broken-window
fallacy explains why thousands of new stimulus jobs are not improving
the total employment picture.
Keynesian economists counter that redistribution can increase demand
if the money is transferred from savers to spenders. Yet this idle
savings theory assumes that savings fall out of the economy, which
clearly is not the case. Nearly all individuals and businesses invest
their savings or put it in banks (which in turn invest it or lend it
out) so the money is still being spent somewhere in the economy.
Even in this recession, with tightened lending standards, banks are
performing their traditional role of intermediating between those who
have savings and those who need to borrow. They are not building
extensive basement vaults to hoard cash.
Since the financial system transfers savings into investment spending,
the only savings that drop out of the economy are those dollars
literally hoarded in mattresses and safes and there is no evidence
that this is occurring en masse. And even if individuals, businesses,
and banks did distrust the financial system enough to hoard their
dollars, why would they suddenly lend them to the government to
finance a stimulus bill?
Once the idle-savings theory collapses, so does all the intellectual
support for government spending as stimulus. If there are no idle
savings to acquire, then the government is merely borrowing purchasing
power from one part of the economy and moving it into another part of
the economy. Washington becomes nothing more than a pricey middleman,
redistributing existing demand.
Even foreign borrowing is no free lunch. Before China can lend us
dollars, it must acquire them from us. This requires either attracting
American investment or raising the Chinese trade surplus (and the
American trade deficit). The balance of payments between America and
other nations must eventually net out to zero, which means government
spending funded from foreign borrowing is zero-sum.
Ive purposely ignored the Federal Reserve, which actually can inject
cash into the economy, but not in a way that constitutes stimulus.
Congress can deficit-spend; Treasury can finance the deficit spending
by issuing bonds; and the Federal Reserve can buy those bonds by
printing money. Any economic boost is then due to the Federal
Reserves actions, not the deficit spending and of course the
Federal Reserve will have to raise interest rates, slowing the economy
again, to bring the resulting inflation under control.
If government spending doesnt cause economic growth, what does?
Growth happens when more goods and services are produced, and the only
true source of this is an expanding labor force combined with high
productivity. High productivity in turn requires educated and
motivated workers, advanced technology, adequate infrastructure,
physical capital such as factories and tools, and the rule of law.
Government spending could boost long-run productivity through
investments in education and infrastructure but only if politicians
could target those investments better than the private sector would.
And it turns out that politicians cannot outsmart the marketplace.
Mountains of academic studies show that government spending generally
reduces long-term productivity.
Furthermore, most government programs that could increase productivity
dont work fast enough to counteract a recession. Education spending
cannot raise productivity until its student beneficiaries graduate and
enter the work force. It can take more than a decade to build new
highways and bridges.
The only policy proven to increase productivity in the short term is
to lower tax rates and reduce regulation. Businesses can grow only
through consistent investment and an expanding, skilled workforce.
Cutting marginal tax rates promotes these conditions, by creating
incentives to work, save, and invest.
Its happened before. In 1981, President Reagan inherited an economy
stagnating under the weight of 70 percent marginal income-tax rates.
Under Reagan, the top rate fell to 28 percent, and the subsequent
surge in investment and labor supply created the strongest 25-year
economic boom in American history.
Such tax-rate reductions are superior to tax rebates designed to put
money in peoples pockets. Rebates like government spending
simply redistribute existing dollars. They dont increase productivity
because they dont change incentives: No one has to work, save, or
invest more to get a tax rebate. The 2001 and 2008 rebates failed
because Congress borrowed money from investors and foreigners and
redistributed it to families. Not surprisingly, any new
personal-consumption spending was matched by corresponding declines in
investment spending and net exports, and the economy remained
If conservatives wish to provide economic leadership, they must get
this argument right. The stimulus is not failing because it is too
small or because too much of it is being saved. Its failing because
Congress can only redistribute existing demand, not create new demand.
This recession will eventually end. The more serious, long-term danger
is that President Obamas Europeanization of the economy will bring
the same slow growth, stagnant wages, job losses, high taxes, and lack
of competitiveness that have plagued Western Europe, leaving the
United States at an ever-growing disadvantage with Asian countries not
To prevent this, conservatives and free marketeers will need to
promote policies that support long-term prosperity. The first step
will be articulating why big government does not bring economic
Post by zayton
Post by Evil Eric Holder, Black Racist
U.S. President Barack Obama and his administration weakened the
country's economy by seeking to foster growth instead of paying down
the federal debt, said Nassim Nicholas Taleb, author of "The Black
The economy was collapsing in on itself when Obama took office, as a result
of the very same policies idiots like this are pushing now.
We would be in a state of martial law now, with whole banking empires
falling like dominos, and virtually every major investment group in
bankruptcy if the collapse had not been halted by the stimulus packages.