The Stimulus Didn’t Stimulate Anywhere

Say, how well did that trillion-dollar stimulus work? Did our economy get stimulated? Did we see economic growth that could last long enough to pay back the impressive interest payments on the debt we racked up? Did unemployment drop measurably, even for a few months?

Nope. What’s more, stimulus programs like the one the administration and its Democratic Party allies in Congress rammed through didn’t work anywhere in the world, though many countries went a long way into hock to try them. Arthur Laffer provided the stark numbers.

Of the 34 Organization for Economic Cooperation and Development nations, those with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.

The four nations—Estonia, Ireland, the Slovak Republic and Finland—with the biggest stimulus programs had the steepest declines in growth. The United States was no different, with greater spending (up 7.3%) followed by far lower growth rates (down 8.4%).

Why big-dollar stimulus plans didn’t work is fairly obvious, if you sit down and think about what massive government spending really does. When a government ramps up spending, it has to take money from productive sectors of the economy and move them to sectors that aren’t producing. The problem with that is, in a recession, those productive sectors are providing whatever forward motion the economy has. Taking resources from them weakens them, slows them down, and there is no guarantee that the money injected into the flaccid parts of the economy will perk them up. Indeed, we know that they won’t because, as Stephen Green wrote, “Consumption doesn’t create wealth; productivity gains, do.”

Laffer fills in the other reason an economic stimulus plan doesn’t work.

Well, the truth is that government spending does come with debits. For every additional government dollar spent there is an additional private dollar taken. All the stimulus to the spending recipients is matched on a dollar-for-dollar basis every minute of every day by a depressant placed on the people who pay for these transfers. Or as a student of the dismal science might say, the total income effects of additional government spending always sum to zero.

Meanwhile, what economists call the substitution or price effects of stimulus spending are negative for all parties. In other words, the transfer recipient has found a way to get paid without working, which makes not working more attractive, and the transfer payer gets paid less for working, again lowering incentives to work.

But all of this is just old-timey price theory, the stuff that used to be taught in graduate economics departments.

We could use a resurgence of old-timey economic know-how in Washington. Maybe next time we won’t be so foolish with our children’s money.

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Our national debt is  
$ 00 00 , 000 000 , 000 000 , 000 000 , 000 000
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