WATCH OUT FOR STIMULUS "LEAK"

January 27, 2009

We know that "stimulus" programs are ineffective, but are they also counterproductive?  A case can be made that the bucket not only leaks but that the leaks tend to drown out chances for economic recovery, says George Melloan, former deputy editor of the Wall Street Journal's editorial page. 

Circumstantial evidence that "stimulus" packages actually delay recovery can be derived from the Keynes-guided New Deal of the 1930s:

  • Federal debt climbed to 43.86 percent of gross domestic (GDP) in 1939 from 16.34 percent in 1929 with very little relief from hard times.
  • Huge Keynesian deficits in the 1970s did not arrest stagflation; the misery index, combining inflation and unemployment, soared above 20 percent.
  • Today, of the $825 billion package not slated for tax credits, the lion's share will go to states and cities, for such things as infrastructure repairs; but in reality, it is a partial federalization of state and city budgets.

The "stimulus" is partly a matter of the political class in Washington looking after its own in the nation's state houses.  One danger of federalization is that it will reduce competition among states to attract investment, thereby weakening another driver of economic efficiency, says Melloan. 

The central defect of government bailouts and stimulus packages is that the money is allocated through a political process.  It goes to recipients who have the most political influence.  Private entrepreneurs and even big business, by contrast, employ investment to earn a profit.  The record shows that the latter yields greater economic efficiency, and hence creates real jobs, explains Melloan.

Source: George Melloan, "Watch Out for Stimulus 'Leak'," Wall Street Journal, January 26, 2009.

For text:

http://online.wsj.com/article/SB123293070246014141.html 

 

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