The Progressives who believe that the government can spend its way out of the current recession typically justify the huge expenditures with one of the follow arguments.
1. If the goventment didn’t do the Stimulus Package, more serious economic calamities would occur. And/or,
2. When the private sector is not spending at a certain level, the government has to jump in to make up the difference, a classic Keynesian view.
Neither argument stands up to reasonable scrutiny. The first one, heading off more serious calamities, is no different than the one George W. Bush used in fighting terrorism. His argument was that we needed to give the government additional powers to avoid unseen calamities caused by terrorists. It is remarkable that the Progressives were able to see Bush’s power grab, but not Obama’s. It all boils down to the glasses one sees through.
The second argument, that government spending can make up for private sector shortfalls, requires a belief in alchemy. First, some rhetorical questions. When is the last time any major governmental spending program achieved the stated goal? For example, has the trillions spent on anti-poverty over the past 40 years eliminated poverty or even put a dent in it? How many broken government promise does it take for us to finally get it?
More to the point, to assume governmental spending can make up for private sector spending shortfalls requires that the spending benefits be greater than the negative impact of the tax increases required to pay for the spending. This is where alchemy comes in; we aren’t paying for the spending, ….. yet. We just keep barrowing, ignoring the fact that some day it has to be paid back. Sort of reminds me of the sub-prime mortgage mess, but on a governmental scale.
The above logic should be enough to conclude that the Stimulus Package could not work and future ones will not work. But, for those that require more empirical data, I suggest an Op-ed from the Wall Street Journal on February 23 by Dr. Robert Barro, professor of economics at Harvard University and a senior fellow at Stanford University’s Hoover Institute. I have posted some of Barro’s comments below, as well as a link to the entire article. His reasoning is sound and may help explain why clear-thinking senators like Evan Bayh have decided to call it a day.
- We need to ask whether the government’s spending reduced or enhanced private spending and whether public-sector hiring lowered or raised private hiring.
- I estimate a spending multiplier of around 0.4 within the same year and about 0.6 over two years. Thus, if the government spends an extra $300 billion in each of 2009 and 2010, GDP would be higher than otherwise by $120 billion in 2009 and $180 billion in 2010. These results apply for given taxes and, therefore, when spending is deficit-financed, as in 2009 and 2010. Since the multipliers are less than one, the heightened government outlays reduce other parts of GDP such as personal consumer expenditure, private domestic investment and net exports.
- Christina Romer, the chair of President Obama’s Council of Economic Advisers, and her husband, David, have been major contributors to research on tax multipliers. Their results, which rely on the history of U.S. tax legislation since 1945, show tax multipliers of larger magnitude than the one I found. (So my conclusions here—based on the coming increases in taxes—would be strengthened if I switched to their estimates.)
- How attractive this short-run deal looks depends on how much one values the added governmental activity. If it’s considered useful public investment—such as building a needed highway or, more modestly, fixing potholes—it might look good. If it’s wasteful spending in a hastily constructed and highly political stimulus package, it looks bad.
- But these calculations are not nearly the end of the story, because the added $600 billion of government spending leads to a correspondingly larger public debt. These added obligations must be paid for sometime by raising taxes (unless future government spending declines below its 2008 level, an unlikely scenario).
- Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.
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