Another Stimulus Boondoggle
By William Shughart • Saturday July 17, 2010 4:39 AM PDT • 11 Comments
Dr. Christina Romer of the president’s Council of Economic Advisers claims that three dollar’s worth of personal income was generated by every federal dollar disbursed under 2009’s “American Recovery and Investment Act”. Mr. Obama has been using that “result” to convince naysayers that a second stimulus package is needed to lower an unemployment rate that has been hovering around nine percent since he moved into the White House.
A government-spending “multiplier” of three is beyond comprehension. As a matter of fact, recent work by Robert Barro suggests that during the Second World War, a $1 increase in government expenditures added less than $1 to U.S. GDP.
The basis for that conclusion answers the question: what are the principal sources of the public sector’s ready money? Washington has just three ways available to it for financing spending programs: taxing, borrowing or resorting to the Treasury’s printing press, all of which suck scarce resources from the private sector. Because wealth thereby is transferred from private to public use, expansions in the number of jobs “created” in “green” industries and other politically favored sectors of the economy must be less than the number of jobs destroyed in the private businesses that are forced to finance governmental economic “stimulus” packages but receive nothing in return.
Given that the national unemployment rate barely budged after the enactment last year of the president’s initiative aimed at financing “shovel-ready” state and local governmental projects, how, exactly, is a second federal stimulus bill supposed to jump-start an obviously stagnant national economy?
Dr. Romer was not very long ago a widely respected student of economic history. Now, as Nobel laureate Joseph Stiglitz before her, she seems to have caught “Potomac Fever” and to have succumbed to the flawed Keynesian idea that deficit public spending can “create” jobs.
A sounder explanation for economic sluggishness includes the pending expiration of the Bush tax cuts, along with the uncertainties created by passage of the Obama administration’s health care and financial reform bills. A market-based economy is extraordinarily resilient, but cannot forever bear anti-business rhetoric and overweening governmental intrusion into affairs best left to the private sector.
Tags: Budget and Tax Policy 
Link?
Steve Verdon | Jul 19, 2010 | Reply
Haven’t you heard? “We are ALL Keynesians, now.”
Public spending can create jobs, in the short term. It’s the long term, that’s key. Even if one were to believe the “multiplier effect”, what effect does it have on long term dollar devaluation? That’s the problem, in general, with inflationary monetary policies.
“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil. ”
- Frédéric Bastiat
There are many, many games being played with the economy right now. From Quantitative Easing (QE) by the Fed, to reversal of FASB (157). Not to mention the manipulation of the numbers. At least, what numbers they still publish. The Fed stopped publishing M3. According to Ron Paul, if you use the old method for calculating CPI, it would be more like 6% (annual), not the 1.5-2% they are selling us. GDP? According to Rubini, who I do not agree with on all issues, most of the GDP growth in the past 2 years is in bank stocks, thanks, of course to TARP, TALF, TLGP, 13(3), and FASB 157, 166, and 167. It has been mostly an accounting driven recovery.
http://www.safehaven.com/article/15635/extend-and-pretend
Mr Whipple | Jul 20, 2010 | Reply
Fine with me. Thanks!
William Shughart | Jul 20, 2010 | Reply
William, I think he was asking for a link to Romer’s comments, or to Barro’s work.
Cliff | Jul 20, 2010 | Reply
Yes a link to Romer saying the multiplier is 3 would be nice.
Steve Verdon | Jul 20, 2010 | Reply
This speech by Romer has her saying she links the spending multiplier is 1.6
http://news.uchicago.edu/files/newsrelease_20090227.pdf
That was about 18 months ago...so what has changed since then.
Steve Verdon | Jul 20, 2010 | Reply
I stand corrected. An unsigned editorial published in the Wall Street Journal on July 15, titled “Three Million Imaginary Jobs”, reports that Dr. Romer assumed a spending multiplier of 1.5 in estimating that February 2009’s stimulus bill had by June 30 “created or saved” between 2.5 million and 3.6 million jobs. She also claimed that GDP had risen by 2.7% and 3.5% between the bill’s enactment and the end of the second quarter of 2010.
Those numbers don’t add up. U.S. GDP in the first quarter of 2009 was $14,178 billion. Using the approximate midpoint of Dr. Romer’s estimate of GDP growth, three percent of $14,178 billion is a bit over $425 billion, which implies a spending multiplier of about 0.5, given that $828 billion was appropriated by Congress to finance the American Recovery and Investment Act.
But despite my error in referring to a multiplier of 3, the main point I made above stands.
William Shughart | Jul 21, 2010 | Reply
I agree that alot of what has been going on with regards to establishing if the stimulus has worked is essentially quite a bit of post hoc ergo propter hoc.
Steve Verdon | Jul 21, 2010 | Reply