STANEK: Two Years of Epic Stimulus Failures

Published March 10, 2011

We’ve just passed the second anniversary of “economic stimulus” under President Obama. Aside from spending on the stimulus itself – the actual price tag soon climbed from $787 billion to $821 billion – not much else has been stimulated.

Nearly a trillion dollars have been poured into the U.S. economy, courtesy of the American Recovery and Reinvestment Act of 2009. Result? Unemployment has barely budged, housing prices continue to fall in many markets and more mortgages slip into foreclosure.

How can this be happening when so many people in government assure us that government spending spurs the economy? Because it’s not true. For government to pour money into the economy, it must take money out of the economy in the first place. To hand out money, government must first take money from taxpayers.

It’s like moving money from the left pocket to the right pocket. It doesn’t make us any wealthier. What it really stimulates is more government, not more economic activity.

Or government can borrow money, which is simply taking money now and promising to pay it back later with money that will come from taxpayers who are around when “later” arrives. Government borrowing reduces the amount of money available for private businesses and individuals to borrow.

The federal government also can create money, which leads to price inflation, making today’s dollars worth less than yesterday’s. We’re already seeing the impact of a less-valuable dollar in items ranging from gold and silver to cotton and gasoline, all of which are at or near record prices. As high prices for essentials such as food and energy work their way through the economy, consumers will have less money to spend on everything else.

The nonsensical idea that government should spend more in economic downturns stems from “Keynesianism,” which is all the rage in government policy circles today, and for good reason. It provides cover to people who believe in expansive, interventionist government.

Keynesianism claims government can spur demand for goods by spending money to make up for what private businesses and consumers are not spending. This provides an excuse to grow government, even when – especially when – the economy is slowing or contracting, and it gives government more power.

But if government spending can boost an economy, how did the U.S. economy ever decline in the first place?

When George W. Bush became president, total federal spending was $1.8 trillion. When he left office eight years later in January 2009, federal spending topped $3.4 trillion. And by 2009, the country was in the second year of the worst economic downturn since the 1930s.

Spending under Mr. Bush increased at more than twice the rate of increase under President Clinton during the 1990s, a decade many Democrats now clamoring for even more government spending point to as years of strong economic growth.

And let us not forget state and local governments. They did their part to supposedly prevent an economic slowdown by expanding their spending by more than $1 trillion – from $1.74 trillion in 2000 to $2.83 trillion in 2008 – when the financial crisis began.

Record government spending did nothing to stop the recession. More government spending will do nothing to end it.

Ah, but what about World War II spending, ending the Great Depression, you say? It did no such thing. Keynesian economists in the 1940s warned the end of war spending and return of millions of soldiers would result in an economy every bit as bad as or worse than we had during the Depression.

Instead, federal spending plummeted from 40 percent of the economy to less than 15 percent (it’s about 25 percent today), unemployment fell to less than 4 percent, and the economy boomed – the opposite of what many government economists said would happen, and another refutation of Keynesianism.

The way to end this recession is for government to cut spending, shrink the deficit, end corporate welfare, stop using taxpayer money to bail out politically connected businesses and industries, and reduce regulations that make investing for the future more difficult.

Steve Stanek is a research fellow at the Heartland Institute and managing editor of Budget & Tax News.