Editor's Note: Reason columnist and Mercatus Center economist Veronique de Rugy appears weekly on Bloomberg TV to separate economic fact from economic myth.
Myth 1: Stimulus spending can jump start the economy and fix unemployment.
Fact 1: Recent experience suggests stimulus spending won't help.
There's no question President Barack Obama inherited a lousy economy. Yet even many prominent Democrats, including Senate Majority Whip Dick Durbin and Democratic National Committee chair Debbie Wasserman Schultz, now acknowledge that after two and a half years in office, the president owns the economy. Unfortunately for him, things still aren't looking so so good. That's why the president called on Congress last week to pass a series of spending measures that he said would boost the economy, including additional infrastructure spending and an extension of the payroll tax cut for another year.
With this in mind, I thought it would be interesting to update my chart on the level of stimulus spending and unemployment rates since 2009.
The chart is based on the most recent data from the Bureau of Labor Statistics and the Center for Data Analysis. As you can see, the administration's promise that the American Recovery and Reinvestment Act (ARRA) would keep unemployment rates from reaching 8.8 percent and would create some 3 million jobs"”90 percent of them in the private sector"”did not materialize.
The unemployment rate started at 7.6 percent when President Obama took office and peaked at 10.2 percent in October 2009. Since the enactment of the stimulus bill in February 2009, the unemployment rate has not approached pre-ARRA levels, even though $382 billion has been made available by government departments and agencies (on top of tax credits and other tax-related items). In fact, unemployment recently edged up, from 9 percent in April to 9.1 percent in May.
Based on this data, it is hard to make the case that doing more of the same will help. Yet that is precisely what New York Times columnist Paul Krugman think we should do. In his view, these dire results are due to a stimulus that was too small. It's difficult to imagine what level of stimulus spending would be large enough for Krugman. What I do know is that we have spent $666 billion to date, yet unemployment remains above 9 percent. And under even the rosiest of assumptions, which claim 2.4 million jobs created, each of those jobs cost $278,000 (see here).
Myth 2: Additional infrastructure spending is an effective way to stimulate the economy and create jobs.
Fact 2: In theory, infrastructure spending injects more money into the economy than other types of government spending. In reality, however, politicians rarely include infrastructure spending in stimulus bills. Instead, they spend money on items like transfers and tax cuts. Only 3 percent of the last stimulus went to infrastructure.
Economists on both sides of the aisles argue that one reason why the stimulus failed is that it wasn't designed properly. Stanford University's John Taylor, for instance, has argued that although much money was spent, very little stimulus money was spent in the form of actual government purchase. In a paper with he co-authored with John Cogan, Taylor finds that, out of the total $682 billion package, federal infrastructure spending was just $0.9 billion in 2009 and $1.5 billion through the first half of 2010"”or less than four-tenths of 1 percent.
Taylor and Cogan also noted that most of the money generated by tax cuts was saved, not spent, and that the money that went to state governments was spent to reduce the states' reliance on borrowing and on other "non-purchase" items, such as transfer payments, subsidies, and interest payments. In other words, the additional money that went to states and taxpayers didn't change a thing. Taylor claims that a better-designed stimulus would have probably been more effective.
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So de Rugy appears to confirm the justifications behind stimulus spending, but says that the most effective forms of spending are not politically viable, so therefore it's all a bust and we should instead... well she doesn't get that far, of course.
There are only two jobs programs offered here that I'm aware of:
1) Let it all burn 2) It'll trickle down, really I promise!
But who gives a shit, really, we're all here united for one purpose: getting the socialist out of the white house, and hey if millions of people out of work helps the cause, fine, we're employed, and we even have a little shop full of misleading-chart gnomes to contribute to the cause.
That is the usual order of things after you fellate us. It clears up in no time, I swear.
Yes, Tony. The tough libertarian medicine is that the Government should do nothing. Swallow it. You know you want to.
He can't swallow anything without first being told that we love him.
But it won't be doing nothing. Your position is simply to crystallize all existing policies. Sounds pretty arbitrary to me.
It's not arbitrary at all. I'd rather see all policies related to shaping the economy be scrapped. Probably not going to happen. But it doesn't matter what the baseline is for the economy. Whatever it is, going forward, if government tweaks based solely on architecting the economy no longer occur, then the economy will improve.
I fail to see how consumer demand, therefore employment demand, will pick up all on its own when currently a lack of both are feeding each other. Government = bad is not economic policy.
Interesting how the business cycle becomes the business death spiral. Tell me more.
So you think people have suddenly stopped demanding goods and services?
Um I think that their lack of having money is what causes it.
I guess the government should quit taking it away then.
Yes, that is part of stimulus--lower taxes. If the GOP really wanted austerity to solve the debt they'd insist on raising taxes. But they won't because they are lying about what they want.
Team Blue lies about what it wants...
Leggo his ears man, let him drive,
so.. now that your policy has been shown to be ineffective, you're saying we should go through with it anyway? Seriously?
He promises it'll work this time.
Definition of insanity.
What's more trickle-down than stimulus from on high?
There's no question President Barack Obama inherited a lousy economy.
But, with diligent meddling, he has managed to turn a lousy economy into a crappy one.
How many times must the idiotic logic accompanying the first figure be debunked. Yes, the administration was wrong that the stimulus would limit the unemployment to 8.8%. No, that does not mean the stimulus did not work. Jesus effin' Christ, the chutzpah to make this kind of 3rd-grade logical fallacy and present it in a "fact/myth" dichotomy is truly astounding.
Right on man! 90% of those unemployment checks that the Feds helped the states pay were actually new jobs in the private sector. Your team won!
listen up, you need more tax cuts for businesses that's the only way to get the economy working. The economy grew huge when bush jr did the tax cuts for the rich cause they make the jobs. plaina and hard truth you need to understand. The stimulus is a big waste of throwing money down the toilet.
Look liek that lady economist says workers don't spend thie rmoney to consume they just save thier money so, giving tax breaks to middle class and poor don't stimulate the economy they just don't have the buying power to keep us a float. the upper class and comoprations invest large sums of money and THAT is what riases the stock market and creates wealth.
Nonsensical rambling.
Lol! More like, real fucking dense.
Nonsense. Innovation is a major factor in economic growth in the United States, when we have significant growth. Not just advances in science and technology, but also in coming up with new and marketable goods and services or variations on existing ones.
If the government simply took less, rather than spending what it has--or rather, doesn't have--on favored constituents or make-work projects, businesses would tend to invest that money in a number of ways, but part of that would be in innovation. Consumers would invest and spend, but a chunk of that would be on new products that result from that innovation.
Government not only is horribly inefficient and politically biased in its spending, but if you look at what it spends money on, much of it is one-off projects or dubious concepts without much commercial or consumer interest and, therefore, without much economic merit. The real "multiplier", in other words, comes when the market keeps its money and spends it on things that participants in the market value.
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