The Economic Stimulus That Wasn't
Economy: Did the hundreds of billions spent to stimulate the economy do the job? And where did all that money go, anyway? A new report crunches the data and finds answers that are devastating for stimulus backers.
Done by Stanford University economists John Cogan and John Taylor and published in Commentary Magazine, the report is blunt in its assessment of President Obama's Keynesian stimulus package: "There was little if any net stimulus."
Worse, say the authors, the White House with its bevy of hip Keynesian-leaning economists should have known it wouldn't work. "The irony," they write, "is that basic economic theory and practical experience predicted this would happen." In other words, the Obama camp should have known better.
But why the stimulus didn't work is a little more complex. The authors break down the three kinds of Keynesian stimulus packages.
In one, government gives money to consumers and hopes they spend it. In another, the federal government directly buys goods and services, ranging from computers to building infrastructure. In the third, government hands money to state and local governments to spend.
The $862 billion stimulus package passed by Congress and signed into law by the president tried to do all three things. Unfortunately, none of them worked - a huge repudiation of the ideas behind Keynesianism.
In the case of money handed over to consumers, "It went to pay down some debt or was simply saved rather than spent on consumption." What about federal infrastructure spending on "shovel-ready" projects? Didn't that work? Hardly. In fact, what's stunning is to discover how little was actually spent on this, the supposed centerpiece of stimulus.
At the federal level, the stimulus generated just $20 billion in added government purchases, about 3% of the total spent. And of that amount, only $4 billion was spent on infrastructure. Four billion - that's it.
Then there were the grants to state and local governments, which were expected to get local economies revving again. Didn't happen, according to Cogan and Taylor.
From the time the stimulus was first enacted in March 2009 to the end of the third quarter of last year, $173 billion was handed out to state and local governments under the plan, the authors say. The impact of all that money? "Negligible."
The reason for this is simple: State and local governments didn't use the money to "stimulate" anything. Instead, they used it to reduce borrowing. In short, we were issuing massive amounts of federal, taxpayer-funded debt to help poorly run states reduce their own borrowing.
This analysis, of course, only addresses how the money was spent - and how little impact it actually had on the macro economy. What it doesn't discuss is that the stimulus failed in another important way: It didn't increase jobs.
The U.S. had 109.51 million private-sector jobs in March 2009. As of December 2010, there were 108.45 million jobs - a decline of nearly 1.1 million. So when the White House claims to have "saved or created" as many as 3.5 million jobs with its stimulus efforts, it's an outright falsehood.
But surely, you say, the $700 billion spent on TARP to bail out U.S. companies and buy up bad loans helped prevent something worse. Well, maybe not.
In remarks prepared for delivery Wednesday to Congress, TARP's special inspector general, Neil Barofsky, is expected to say that the program's lasting legacy is a sorry one:
"In short, the continued existence of institutions that are 'too big to fail' - an undeniable byproduct of former Secretary Paulson and Secretary Geithner's use of TARP to assure the markets that during a time of crisis that they would not let such institutions fail - is a recipe for disaster."
Hardly a vote of confidence for more meddling in the economy.
The world has known at least since the 1970s that Keynesian "stimulus" is a dead end. Yet like a movie vampire, it keeps rising from the grave of bad ideas. If we get nothing else for the money, can't we at least use these data to put an end to such silly superstitions?
