Tuesday, May 29, 2012

The stimulus failed: Here is the evidence

The next time any of your liberal friends talk about how we would have been in a depression had it not been for the stimulus, please send them a link to this post.
When left-wingers make the case that the stimulus program was necessary, they often refer to economic theory. Some of this theory is quite well-supported actually (my problem with keynesianism has never been the theory; its been the practical applications).
I’m an economist, not a dogmatist. I’m not interested in debunking the “stimulus saved the economy”-myth for ideological reasons. If Obama does something right, I’m more than happy to concede this (like when he gave the order to kill Bin Laden).
I’m interested in debunking it because it’s wrong, and because this myth is dangerous: If it becomes a common perception that the stimulus is what ended the recession, then obviously next time there is a recession the public will call for another stimulus program which will add another nice trillion to the US national debt, which future generations will have to pay back.
So how can we know that the stimulus didn’t end the recession?
Let’s look at some simple chronology: The stimulus was passed in February 2009. The recession ended in June 2009.
So what? Surely as long as the stimulus was passed before the recession ended, then there’s no way of proving that the stimulus money wasn’t what cured the economy.
Not so fast though. The thing is, out of the roughly 800 billion that was the stimulus, only 84 billion dollars had been spent by september 2009. Now, assuming stimulus spending was the same each month from march to september, that implies only 42 billion was spent before the recession actually ended (this of course is an imprecise figure, but the point remains).
We can now from this draw either of two conclusions:
1) 42 billion dollars was enough to prevent a second Great depression, even though 42 billion dollars is just about 0.3 % of the size of the US economy. This then begs the question; what was the purpose of passing a 787 billion dollar stimulus bill, given that 42 billion was enough to save us from the apocalypse Obama predicted would happen if the stimulus bill wasn’t passed? Seems like those other 735 billion that was added on to the national debt was all for naught in that case.
2) The stimulus money had nothing to do with the fact that the recession ended. Hence, all the 787 billion dollars was a waste (not just 735 billions of it).
Doesn’t look too good either way, does it? But wait, there is a third scenario that I have to respond to lest liberals pester me with it in the comments section:
3) The stimulus, while it didn’t itself aid very much in the recovery of the economy through increasing aggregate demand, did change expectations. Investors and employers got optimistic again (in keynesian language, there was a change in “animal spirits”) because now that there was a stimulus package about to be spent, they figured aggregate demand would soon pick up and so they began investing and hiring again.
Theoretically, that could happen. But I’m pretty sure it didn’t. First of all, hiring did not pick up with the stimulus – the unemployment rate would continue to go up long after the recession had ended actually. Investors and employers never really liked Obama, nor the stimulus anyway, so to believe that their expectations changed for the better when the stimulus bill was passed is quite ridicoulous. They never trusted Obama and trust him even less now.
Finally, let’s consider a “what-if” scenario: What if the stimulus did indeed shorten the recession? We don’t have to care about how that would be possible, let’s just say it is somehow. The question then becomes: By how much did the stimulus shorten the recession, and can we reasonably argue that it was worth it?
Let’s say the stimulus shortened the recession by three months. Was it really worth spending 787 billion dollars to make that happen? Really? That would work out at (roughly) 250 billion per month, money that future generations will have to pay back. Here’s a question for liberals: You always talk about caring about future generations when it comes to the environment. You even go as far as telling us we have to lower our current standard of living, just so that a clean environment will be available to future generations as well. I can completely understand (even if I don’t entirely agree with) that sentiment. But why are you being so shortsighted when it comes to recessions? Maybe, just maybe, we could endure another three months of recession (with all the pain that it would mean for the current generation), just so that our grandchildren won’t have to pay back 750 billion dollars with interest? Can’t we do that sacrifice for them?
I think we should. The recession was caused by our mistakes, and future generations should not have to pay for it. Of course, like I said, I don’t believe the stimulus shortened the recession at all, but even if it did do so marginally I have a hard time seeing the benefit being worth the cost.
This will do for now. Thanks for reading. Please forward this post to any liberal friends you might have.
John Gustavsson

2 comments:

leighrow said...

Great points. I have liberal aunties who are teachers who are constantly stating as fact that the stimulus saved the U.S.. Economy. I will reference your points at our family's 4rth of July picnic. Should make for good fireworks:)

John said...

Thanks! I will fix the post so that the white goes away. :)