NCPA - National Center for Policy Analysis

"Stimulus" Snake Oil

September 13, 2010

Democrats argue that the U.S. unemployment rate, still stuck at 9.6 percent, is reason to try "a second fiscal stimulus" to raise "aggregate demand."  That's wrong, says Alan Reynolds, a senior fellow with the Cato Institute.

Unlike the rapid recoveries from other recessions in 1975-76 and 1981-82, this anemic recovery is the first time the United States has ever experimented with "fiscal stimulus" on a large scale.

  • FDR did not use fiscal stimulus (despite what many people think) and the budget deficit peaked at 5.9 percent of gross domestic product (GDP) in 1934, falling to 4 percent in 1935.
  • Today, the Congressional Budget Office (CBO) adjusts such deficits for the impact of recession, meaning the U.S. economy actually grew by 10.9 percent in 1934 and 8.9 percent in 1935 without any "fiscal stimulus."
  • After the stagflationary recession of 1974-75, federal spending was cut from 21.4 percent of GDP in 1976 to 20.7 percent in 1977 -- and economic growth averaged 5 percent in those years.
  • In 2009, by contrast, spending jumped to 24.7 percent of GDP from 20.7 percent in 2008 -- up four points in a single year. Even the CBO's cyclically adjusted budget deficit was 7.5 percent of potential GDP -- nearly 3 percentage points above the previous all-time high.

Yet Democrats want even more "fiscal stimulus" in order to boost domestic demand -- that is, total spending by U.S. consumers, business and governments.  They point to the second quarter's weak 1.6 percent growth in real GDP, but GDP doesn't measure domestic demand.

As the second quarter GDP report clearly stated, "Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever produced -- increased 4.9 percent in the second quarter, compared with an increase of 3.9 percent in the first."  Whatever the problems of the U.S. economy, slowing growth of demand is not one of them, says Reynolds.

Source:  Alan Reynolds, "'Stimulus' snake oil," New York Post, September 7, 2010.

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