Failed Stimulus

source

Stimulus Spending Equals More Debt, Not Economic Growth

Yet this was the recovery that was aided by the largest Keynesian-style big government “stimulus” since World War II. Since 2008, total federal “stimulus” has been $4.6 trillion, as shown in the chart. As a share of GDP, recent deficit spending has been far greater than during all other recessions since the war.

Biggest Keynesian Stimulus + Slowest Recovery = Time to Rethink Keynesian Theory.

source

CBO on the Stimulus

Change Attributable to ARRA, GDP change (percent)
		Low Estimate	High Estimate
2009	Q1	0.1	0.1
2009	Q2	0.8	1.3
2009	Q3	1.2	2.4
2009	Q4	1.4	3.3
2010	Q1	1.7	4.1
2010	Q2	1.7	4.5
2010	Q3	1.5	4.2
2010	Q4	1.1	3.6

source

Total Stimulus: $1 Trillion

With the passage of a $26 billion state aid package Tuesday, Congress has approved over $1 trillion in spending and tax measures to stimulate the economy, according to a recent summary of the legislation by two independent economists. This fiscal stimulus has been just a part of the government's response to the recession, which also includes policies such as TARP, homeowner assistance and initiatives by the Federal Reserve.

source

Debate: More Stimulus?

Eighteen months after President Barack Obama administered a massive dose of spending increases and tax cuts to a weak economy, a brawl has broken out among economists and politicians about whether fiscal-stimulus medicine is curing the illness or making it worse...

One side says Mr. Obama's $862 billion fiscal stimulus prevented an even graver recession. Cutting the deficit right now, this side insists, would send the economy into a tailspin. The other side questions the benefits of the stimulus and argues addressing long-term deficits now is crucial to avoid higher interest rates and even bigger economic problems down the road.

And then there is a camp in the middle—defending last year's stimulus, but urging a deficit-cutting plan now...

"Too many are searching for answers in the discredited economic playbook of borrow-and-spend Keynesian policies," Rep. Paul Ryan, a Wisconsin Republican who is pushing a long-run deficit cutting plan, said this month. "I reject the false premise that only forceful and sustained government intervention in the economy can secure this country's renewed prosperity."...

Richard Trumka, president of the AFL-CIO union alliance, says if the government starts cutting deficits now, "We'll slip back into recession and possibly depression."...

But today, neither side can say with certainty whether the latest stimulus worked, because nobody knows what would have happened in its absence.

Fed Chairman Ben Bernanke backed fiscal stimulus in early 2009. Now he says the economy still needs fiscal stimulus, but says it must be accompanied with a credible plan to reduce future deficits. Like the Obama administration, he doesn't think that plan should be implemented until the economy is on more solid footing...

The case that government deficit spending can be vital at times of recessions dates to John Maynard Keynes, the British economist whose teachings dominated economics for decades after the Great Depression. "Pyramid-building, earthquakes, even wars may serve to increase wealth," Mr. Keynes said in his 1936 classic, "The General Theory of Employment, Interest and Money."

A counter-revolution led by Milton Friedman, of the University of Chicago, de-emphasized the role of government and gave rise to Ronald Reagan and Britain's Margaret Thatcher. Keynes lost favor during the stagflation of the late 1970s and early 1980s. The Fed and its manipulation of interest rates came to be seen as the best way for governments to manage the short-term ups and downs of the economy...

The Obama administration is stocked with heirs of Mr. Keynes, including academics Christina Romer and Mr. Summers. Ms. Romer famously projected in January 2009 that without government support, the unemployment rate would reach 9%, but with support the government could keep it under 8%. It's 9.5% today...

Underlying the debate is a long-running argument about how much of a lift the government gets from spending more or taxing less. Keynesians argue that when the economy is distressed, a dollar spent by the government multiplies in value. It gives a worker income the private sector has failed to produce, which he spends, creating demand for goods and services.

Ms. Romer argued last year that this "multiplier" for government meant every dollar spent created about $1.50 worth of demand...

Robert Barro, a Harvard economist, found even smaller multipliers: A government dollar spent creates about 80 cents worth of growth, or possibly less, he says. Government spending, he says, crowds out private sector spending that would otherwise be taking place...

Carmen Reinhart, a University of Maryland economist who has studied the fiscal aftermath of financial crises, says more stimulus could be counterproductive because it could lead the public to expect even higher taxes in the future...

"We are not in an easy position," she says. "Credibility is going to be difficult to achieve."

read the entire WSJ article

My thoughts: Central planning does not work. It does not matter if the method of central planning is fiscal policy or monetary policy. Politicians do not understand how economies work.
A recession is better understood as a "market correction". When a cluster of errors occurs from artificially low interest rates, this generates an unsustainable boom. Once the boom occurs the bust is inevitable. The Fed created the boom. Ben Bernanke will eventually be known as the worst Fed chairman ever. The Creature from Jekyll Island hopefully will die a quicker death due to the incompetence of Bernanke.

Keynesian economics never truly died, it was merely displaced by the monetarist economics of Milton Friedman and the Chicago School. Mainstream economic thought came to believe that monetary policy was most effective and that Keynesian solutions should be reserved for when monetray policy could not produce the desired effects.

Both Keynesians and monetarists do not truly understand how economies work. For the Keynesians, you can't spend yourself into prosperity. Pyramid-building, earthquakes, and wars are the solution to economic problems. Pyramid-building (also known as public works) is an unnecessary function of government that only serves to put the nation into deeper debt. Earthquakes and wars kill people and destroy capital, which is the opposite of what is needed for economic growth. For the monetarist, attempting to paper over a bubble that was originally created by easy money policy is insane. You don't solve problems by doing the same thing that caused the problem to begin with.

Stimulus Failure

In the world’s leading economy, 8 million jobs have been lost. The US government disappeared almost a million jobseekers from the unemployment lists in the last two months to try to make the numbers look better. Still, fewer people have jobs now than when the stimulus began. Those workers with jobs earn less than they did then. And those who lose their jobs wait longer than ever to find a new one. Housing is sinking again, too, with nearly half of all the mortgaged houses already worth less than their mortgages. Illinois has stopped paying its bills. California is laying people off wholesale...

Spend now; cut later,’ is still his advice. But with so much spending…and so little to show for it…you’d think he’d be shy about proposing more. At least, he might feel the burden of proof more heavily upon his shoulders. Is there any evidence that increased government spending – even in time of private sector retrenching – makes people better off? And even if ‘spend now, cut later’ were good advice, is there any evidence that they can actually do it? None that we know of.

Based on the experience of the ’80s and ’90s, we observed last week that it didn’t seem to matter what governments did or what they said…the markets went about their business. Today, we add a further provocation.

Let us take a look back at the penultimate budget of the Clinton years:

“Eight years ago, our future was at risk,” Bill Clinton congratulated himself on Sept. 27, 2000. “Economic growth was low, unemployment was high, interest rates were high, the federal debt had quadrupled in the previous 12 years. When Vice President Gore and I took office, the budget deficit was $290 billion, and it was projected this year the budget deficit would be $455 billion.”...

The Clinton era boom is now the Obama era bust. When the contraction hit, the feds followed the formula. They mustered their fiscal and monetary stimulus. But they got no recovery. Spending more now won’t help. Not because the Obama team is less competent than the Clinton crowd. They are just unluckier. Credit is contracting.

So Krugman will be proven right after all after all. Austerity will not bring prosperity. But then, neither would stimulus. Krugman will say ‘I told you so’…and spend the rest of his career in darkness and confirmed delusion.

source

Cartoon: Stimulus 2

Bernanke Backs Obama's Fiscal Policy

The chairman of the Federal Reserve on Tuesday tacitly endorsed President Obama’s call for huge increases in spending and trillion-dollar deficits over the next couple of years, saying the economic crisis required aggressive action.

Though the chairman, Ben S. Bernanke, did not endorse any of Mr. Obama’s specific proposals, he echoed the president’s call for bold government action to address the economy’s immediate travails and pointedly refused to criticize his longer-term
plans.

“All else equal, this is a development that all of us would have preferred to avoid,” Mr. Bernanke told the Senate Budget Committee, referring to record-breaking deficits expected this year and in the next two years. “But our economy and financial markets face extraordinary challenges, and a failure by policy makers to address these challenges in a timely way would likely be more costly in the end.”

read the New York Times article

My thoughts: Not a big surprise. It these guys are so confident that they can solve the problem, why are they incapable of preventing the problems to begin with?

Can the Government Spend Its Way Out of a Recession?

Fiscal Stimulus: Too Little, Too Late

The history of anti-recession efforts is that they are almost always initiated too late to do any good. This chart, based on recession timelines from the National Bureau of Economic Research, shows the enactment of stimulus plans is a fairly accurate indicator that we have hit the bottom of the business cycle, meaning the economy will improve even if the government does nothing.

from the New York Times


My thoughts: The recession began in December 2007. The stimulus will pass in February 2009. Congress doesn't let much slip by them. The economy could potentially start the recovery phase as early as March, April, or May 2009. Too little, too late.

TARP: Round 2 $356 Billion and Lags

2009: 29.0
2010: 115.8
2011: 105.5
2012: 53.6
2013: 26.5
2014: 13.0
2015: 6.9
2016: 3.0
2017: 1.6
2018: 0.9
2019:0.4

Total: $356.0 billion

from CBO

My thoughts: Congresss screams we must do something now. Yet, the majority of the spending occurs after the recession in projected to be over.

Cartoon: Tax Rebate

What the Rebates Means

Single filers with AGI below $75,000 will get rebates of as much as $600. Couples with AGI below $150,000 will receive rebates of up to $1,200.

In addition, parents will also receive $300 rebates per dependent child; there is no cap on the number of children eligible.

An example: A couple with one child and $100,000 in AGI will get a rebate of $1,500 ($1,200 + $300). If they have two children, they will get $1,800 ($1,200 + $600)...

Do I have to pay the rebate back?

No. And here's why.

Your rebate is a one-time tax cut - an advance on a credit you'll receive on your 2008 return.

It's based on your 2007 income initially. If it turns out that your 2008 income and number of children would have qualified you for a larger rebate than the one you received, you'll be sent the difference. If it turns out your 2008 income was lower than in 2007 and you should have gotten a lower rebate, you get to keep the difference.

read the CNN story

Best advice: invest the money.

Fiscal Stimulus Package

Sources on Capitol Hill and at the Treasury Department said the plan would send checks of $600 to individuals and $1,200 to couples who paid income tax and who filed jointly.

People who did not pay federal income taxes but who had earned income of more than $3,000 would get checks of $300 per individual or $600 per couple.

A Democratic aide and Republican aide said there will be an additional amount per child, which could be in the neighborhood of $300.

Those who earn up to $75,000 individually or up to $150,000 as a couple will be eligible for the payments, said Republican and Democratic sources familiar with the tentative deal.

read the CNN story

Fiscal Policy Lag

The history of anti-recession efforts is that they are almost always initiated too late to do any good. This chart, based on recession timelines from the National Bureau of Economic Research, shows the enactment of stimulus plans is a fairly accurate indicator that we have hit the bottom of the business cycle, meaning the economy will improve even if the government does nothing. — Bruce Bartlett, author of “Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy.”

from the New York Times

Tax Rebates: Little Impact on the Economy

The underlying theory for the rebate idea traces back to the British economist John Maynard Keynes. He believed that spending was the driving force in the economy. It didn't matter whether the spending was done by businesses on capital equipment, by governments on public works, or by consumers -- spending is spending in the Keynesian model, and all of it is stimulative...

In 2001 -- despite the thoroughness and general acceptance of these studies -- Congress and the White House once again chose a one-shot tax rebate to deal with an economic slowdown in 2001.

To his credit, Treasury Secretary Paul O'Neill cautioned against the rebate. "I was here when we tried that in 1975, and it just didn't work," he said. "If we want to change consumption patterns, we need to make permanent changes in peoples' tax burdens."

In short, there is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns. The increased personal saving doesn't help the economy because the federal budget deficit, which can be thought of as negative saving, offsets all of it in the aggregate. The main benefit of a tax rebate would seem to be political -- giving politicians a way of appearing to be doing something about the nation's economic problems that is superficially plausible.

A new rebate probably won't do much harm. But anyone who thinks it will prevent a recession -- if one is actually in the pipeline, which is not at all certain -- is dreaming... It should be called "feel good economics" because its only real effect is to make politicians feel good about themselves and buy re-election with the public purse.

from Bruce Bartlett "Feel Good Economics"

I am shocked that politicians would attempt to buy votes.