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GHEI: The unstimulated economy

Presidential spending binge brings more unemployment, not less

- The Washington Times - Friday, July 8, 2011

President Obama rammed his so-called stimulus bill through a Democratic Congress less than a month after taking office in 2009. According to the Congressional Budget Office, the American Recovery and Reinvestment Act (ARRA) will cost Americans $840 billion. Unfortunately, this massive sum has failed to buy Americans any respite from economic woe. It has done little more than bury Americans under yet more debt and lengthen lines at the unemployment office. The nation's jobless rate climbed to 9.2 percent last month, according to figures released Friday. We're headed in the wrong direction.

Mr. Obama's top advisers would have us believe otherwise. In its Seventh Quarterly Report, issued July 1, the President's Council of Economic Advisers concluded that $666 billion spent through the third quarter of last year resulted in "creating or saving" about 2.4 million jobs. Accepting the claim at face value, that works out to $277,500 per job. It would have been cheaper to cut a $100,000 check to each "job" holder and pocket the $426 billion difference. The unemployment rate has gone up, not down, since then.

Stanford University economist John Taylor followed the billions and documented how the concept was flawed from the start. The president's giveaway scheme had three parts: tax credits and transfer payments, which went to households; direct federal spending; and grants to state and local bureaucracies.

Household goodies included a one-time $250 payment, refundable credits and the "making work pay" tax credit. The idea - stolen from the John Maynard Keynes playbook - was that increasing disposable income would make people spend more and boost aggregate demand. The federal government was supposed to undertake infrastructure investment immediately to stimulate demand. State and local governments received massive amounts of funds for projects requiring the purchase of goods and services to jump-start aggregate demand.

It sounds great in theory, but none of this ever happened. Households, in an entirely rational response, socked away the one-time transfers to their savings accounts. They saw no need to change their consumption patterns based on temporary boosts to their incomes. The federal government discovered, as Mr. Obama himself has admitted, that the shovels weren't exactly ready. Mr. Taylor estimates that at the peak of the stimulus spending binge, federal government purchases credited to ARRA reached 0.21 percent of gross domestic product (GDP) and federal infrastructure expenditures just 0.05 percent of GDP.

The failure of countercyclical spending policy was just as complete at the state and local level. As the $126 billion cash infusion began flowing, most of the funds were used as a backdoor bailout for reckless, near bankrupt statehouses and big-city mayors. As Mr. Taylor points out, the expected increase in state and local government purchases never happened during this period. Cash-strapped states used the federal funds to cut back on borrowing; those in better fiscal shape show an increase in net lending, which, in fact, was the smart thing to do with a one-time cash infusion.

The overall reason for the stimulus failure was that people are, for the most part, rational. They do not change their consumption behavior in response to temporary changes in disposable income - especially when they are aware that the bill will come due soon in the form of higher taxes. It's a pity Congress and the president didn't figure this out $840 billion ago.

Nita Ghei is a contributing Opinion writer for The Washington Times.

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