WHY THE STIMULUS FAILED

September 4, 2009

Conservatives have correctly declared President Obama's $787 billion "stimulus" a flop.  In a January report, White House economists predicted the bill would create (not merely save) 3.3 million jobs.  Since then, 2.8 million jobs have been lost, pushing unemployment toward 10 percent, says Brian Riedl, a research fellow at the Heritage Foundation.

Yet few have explained correctly why the stimulus failed.  By blaming the slow pace of stimulus spending (even though it's ahead of schedule), many conservatives have accepted the premise that government spending stimulates the economy.  Their thinking implies that we should have spent much more by now.

But history proves otherwise:

  • In 1939, after a doubling of federal spending failed to relieve the Great Depression, Treasury Secretary Henry Morgenthau said that "we have tried spending money. We are spending more than we have ever spent before and it does not work. . . . After eight years of this administration we have just as much unemployment as when we started . . . and an enormous debt to boot!"
  • Japan made the same mistake in the 1990s, building the largest government debt in the industrial world.

The simple reason government spending fails to end recessions is that Congress does not have a vault of money waiting to be distributed, says Riedl.  Every dollar Congress "injects" into the economy must first be taxed or borrowed out of the economy.  No new income, and therefore no new demand, is created.  They are merely redistributed from one group of people to another.  Congress cannot create new purchasing power out of thin air.

The mistaken view of fiscal stimulus persists because we can easily see the people put to work with government funds.  We don't see the jobs that would have been created elsewhere in the economy with those same dollars had they not been lent to Washington.

Source: Brian Riedl, "Why the Stimulus Failed," National Review, September 7, 2009.

 

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