Stimulus a Big Boost for Government

Wednesday marked the first anniversary of the American Recovery and Reinvestment Act, popularly known as the Obama stimulus package. The White House, not surprisingly, put on a full-court press, releasing a report that claimed the stimulus saved the country from having a recession degenerate into a full-blown depression, "saving or creating" some 2 million jobs and building a foundation for a new economic foundation built on clean energy and revitalizing America's infrastructure.

Needless to say, these estimates are politically inflated.

The philosophy behind massive government spending during a recession is that such spending will have a Keynesian "multiplier effect" as money circulates from one hand to another to another. The multiplier effect is a controversial concept. Harvard economist Robert Barros, for example, has done studies of spending during the Great Depression and other economic downturns that permit him to estimate the multiplier effect at about 0.6. In other words, for every $100 in government spending the economy gets a jolt worth about $60.

That's hardly an impressive return on investment. Admittedly, Barros' estimates are at the low end of what most mainstream economists believe happens when government spends money. The infusion may provide some lift, but the evidence that it leads to a magical doubling or tripling of economic ripple effects is nonexistent.

The reason is simple.

For the government to spend money it first has to take it from the private wealth-producing, job-creating sector of the economy, whether through taxation or borrowing. What is stimulated by such spending is not economic growth but government growth.

Most economic forecasters believe that the recession began about December 2007, was exacerbated by the financial crisis of Fall 2008, and was likely to have started turning up toward the end of 2009, with or without a massive government stimulus.

When the stimulus was being debated — $787 billion at the time, estimated at $862 billion now — White House economists estimated that unemployment levels would be held to about 8 percent if it passed. However, unemployment increased to 10 percent during 2009 and now stands at about 9.7 percent. Obviously, the initial promises were not fulfilled.

The category of "jobs saved or created" is not a standard term of economic analysis. It is a political term imbued with a great deal of speculation. What is clear, however, is that almost all the jobs the White House discusses are in the public sector — firefighters, police officers, state and municipal workers, and teachers. Such jobs are not creators of wealth but instead depend for their existence on money taken from the wealth-creating sector of the economy.

It is quite possible that the economic downturn might have been worse if the stimulus bill — only one-third of which has been spent — had not been passed and implemented. It is obvious, however, that White House claims are grossly inflated.

REPRINTED FROM THE ORANGE COUNTY REGISTER.

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