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The Public Policy
The Stimulus Delusion
Officially stimulus spending adds to the GDP. In fact, it is bleeding us dry.
Popular delusions are always debunked, but rarely before they do a lot of harm. The ancient physician Galen believed that bloodletting, the forced removal of blood from the body by the opening of a vein, could remove excess blood from the body and improve health. Countless sick people suffered for this delusion until the English doctor William Harvey realized that blood circulated through the body in the 1620s (although the practice continued for some time, with even Founding Father Benjamin Rush being an enthusiast). Today, the American economy suffers from a similar form of quackery.
There is now evidence that the process of Keynesian stimulus spending is just as harmful to the body politic. For nearly a century, politicians have been bleeding the economy when it has been at its sickest. To cure this delusion, just as physicians stopped talking about bodily humors, we need to stop talking about gross domestic product (GDP).
Our William Harvey is the economics professor Burton Abrams, who, in a new article for the Economists’ Voice, reveals that the American Recovery and Reinvestment Act, the $800 billion “stimulus act,” actually made the nation worse off by at least $475 billion. That figure alone should stop the current calls for stimulus stone dead.
The reason it cost so much is because, although some public debt can be beneficial, economists now recognize that once public debt reaches a certain level it becomes a drag on the economy. So debt-funded stimulus, of the sort that Keynesian physicians prescribe for a weak economy, can be exactly the worst thing to do if debt is already at high levels.
American debt is already above all the “tipping points” postulated by economists. Therefore, the increase in debt to fund the stimulus has reduced our long-term growth rate by a present value of $1.875 trillion.
If we believe the Keynesians, and accept that every dollar of public money spent in the stimulus did stimulate $1.75 of economic activity, we see that the stimulus provided $1.4 trillion of benefits. So Abrams’s $475 billion is in fact a best case scenario. Of course, there is a strong possibility that the stimulus did not provide anywhere near the benefits claimed. If the stimulus didn’t work and just wasted money, as most free market economists believe, then the cost was even higher.
The reason why we fall for the Keynesian argument for stimulus every time (President George W. Bush did, too) is that our main measure of economic well-being, gross domestic product, is designed to respond well to stimulus spending. The amount of stimulus spending is simply added to the GDP figure, with no accounting for the effects of debt. That stimulus increases GDP is a self-fulfilling prophecy.
To shake off this stimulus delusion, we need a new metric. Martin Hutchinson, co-author of the brilliant book, Alchemists of Loss: How modern finance and government intervention crashed the financial system, has suggested that we instead consider what he calls gross private product (GPP). GPP measures the value of transactions between a willing seller and a willing buyer, so activities that occur only because government wants them to, like ethanol mandates, do not count. GPP tells a much different story about Keynesian success stories, like the Second World War, and makes much more sense.
Without a shift away from GDP as our main measure of growth, we will continue to see politicians calling for stimulus and claiming success when GDP goes up, even as our economic welfare suffers. William Harvey’s discovery led to the use of blood pressure as a vital sign — a much more accurate assessment than the balance of “humors.” While people still insist on the efficacy of debt-funded stimulus and the relevance of GDP, we will remain stuck in the economic dark ages.
About the Author
Iain Murray heads the Center for Economic Freedom at the Competitive Enterprise Institute and is the author of Stealing You Blind: How Government Fatcats Are Getting Rich Off of You.
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POST American| 10.25.11 @ 6:21AM
"Understand folks, your stimulus,
your tax money --has been used to
move the last of your economy to
RED China-"
-ALAN WATT
(superb online coverage
of the CON)
Understand ----THIS IS TREASON.
--------------------UNDERSTAND---------------------
---------HUAC meets NUREMBERG 2012----------
tsd| 10.25.11 @ 7:44AM
Most of the numbers provided by your government to show you how well they are doing, on your behalf are fabricated by politicians ... not reported by real economists or mathematicians. As they say figures don't lie... liars just figure. Government inflation numbers don't include food or fuel ....what?? GDP includes cash injections from government loans .... what ??? Global warming based on CO2 .... what??? BS from your government to blow smoke up your back side ... go figure.
Moe Blotz| 10.25.11 @ 8:47AM
Oy tsd, in your last line you have suggested the perfect orifice from which to blow back.
race_to_the_bottom| 10.26.11 @ 8:50PM
Shadowstatistics.com has exposed all the fiddling with the CPI and the unemployment rate. GDP is nonsense because useful activity is comingled with activities which are actually COSTS and should be deducted from GDP. Example: if you create a society which requires a million lawyers and two million private security guards to function, the costs associated with these functions should be DEDUCTED from GDP instead of being part of GDP. There are many more examples and explain much of the absurd situation where GDP can triple or quadruple and people's living standards drop at the same time
Ground Control| 10.26.11 @ 9:51PM
The same people who figure government mandated activity as GDP also figure taxes "paid" by government employees and adding revenue to the treasury. In truth, government employees are paid out of government revenue, and their taxes paid are only a portion of that same money making a U-Turn. It adds nothing. Govenrment wages are also added to GDP, further inflating the figure. We live in a fantasy economy created by thieves in government.
RJ| 10.25.11 @ 7:49AM
Whenever I hear a politician or a member of the media (there is little difference these days) talk about stimulus, I have the visual image of a drug addict talking about crack. Economic stimulus, based on more debt, is a lie. More debt is not the answer to an economy plagued with too much bad debt. We certainly do need to get rid of crack-head economics.
race_to_the_bottom| 10.26.11 @ 8:53PM
Correct. More debt is not the answer. The answer is for the government to reclaim its monopoly on money creation. Debt free money.
http://www.monetary.org/
Timothy L. Pennell| 10.25.11 @ 9:01AM
Am I really Smart? Cause I think that I could have done this so much better than the Dirtbag in the White House, has.
The #1 Problem in a Representative Republic, is the "Representatives". They just can't be trusted. "Power Corrupts" and "The Desire for Money is the Root of all Evil". Put the two together, and you have Washington D.C. Some people think that Term Limits would solve the problem, yet, the President is Term Limited, and see how long this President has been CAMPAIGNING for the NEXT Election, when he should be doing his job. Everything he's doing, now, is with 2012 in mind. That is not good, for you and me.
Okay. So where am I going with all this?
The purpose behind a STIMULUS is what? No. It is NOT for "Walking Around Money" for your Union Thug Buddies, so they can funnel it back to you, in Campaign Contributions. That's what happened, but, that's not what it's supposed to be used for.
Stimulus is for Stimulating. For Priming the Economic Pump. Now, we already know that the "Representative" half of our Representative Republic, CANNOT be trusted with Money. But, what about the other half? What about the "Republic"?
What about Us?
If you listen to the numbers being bandied about, some of these "JOBS" that are being "Created" are costing Hundreds of Thousands of Dollars EACH. The Home Insulation Programs' "Jobs Created" have come in at over a MILLION a piece. And the list goes on and on.
What about US? Why not just give US the money, and cut out the Middle Man? You could have given every man, woman, and Child $300,000 and it would have been LESS than the $784 BILLION that was PISSED AWAY in the 1st Stimulus/Slush Fund. and we got NOTHING for our Investment.
What could we the people, have done with $300,000?
We could have gotten off of Welfare. Gotten off of Unemployment. We could have bought the things we need. Automobiles. Homes. (I need a Truck) It would have made the Economy EXPLODE.
And, please, don't give me the Inflation mantra. We've got that ANYWAY, compliments of the 3 Queen Marys. QE1, 2, and 3. (Oh. it's coming. Don't you worry about that)
All of these machinations. All of these Gimmicks. It all comes down to POWER. It all comes down to Who you Trust.
I trust ME, to spend my money right. I trust ME, to know what's best for my Family.
What about YOU?
Whom do YOU trust?
DRed| 10.25.11 @ 10:39AM
There are (roughly) 300 million Americans. If you gave each one of them $300,000 it would cost 90 trillion dollars.
PCC| 10.25.11 @ 11:25AM
Now that's a stimulating plan!
Could I please have my $300,000?
Truth to Power| 10.25.11 @ 12:27PM
DRed is right. This was always about Obama passing money out to politically supportive groups in what has to be described as kick back corruption. The common good was no where to be seen. What kind of idiots supported this stimulus? When DRed is right he is really right. Not bad for an idiot.
TrueBlue| 10.25.11 @ 2:35PM
Each person getting their $2613 would still have been more effective than their "stimulus" plan.
Sam Vaughn| 10.25.11 @ 2:37PM
And today's 30k car would quickly cost $300k
race_to_the_bottom| 10.26.11 @ 9:37PM
Well, Tim, I think we all know Washington is corrupt because everyone we sent there is on the take. It takes huge amounts of money to get there. Where can this money come from? Not me or people I know. Probably not you either. If by some miracle, someone gets to Washington by a massive grassroots effort, they soon learn that if they want to stay there, they have to play ball with the big money. In return, big money owns these people. We know the answer is to eliminate the influence of big money in our politics. No brainer.
So its only the end of 2011 and Obombya is ALREADY campaigning for reelection? A WHOLE YEAR BEFORE THE ELECTION! Heavens. That never happened before, did it.
Now the stimulus. Here's an accounting from the WSJ on where the money went. I don't see much here that is too outrageous. Nothing like funding for weapons designed to fight the Cold War.
I also seem to remember that a lot of it was tax cuts.
http://online.wsj.com/public/r....._0217.html
Also your math is flawed. The stimulus was not $300,000 per capita; more like $2,000. Oh well, whats an order of magnitude or two among friends.
Ok, I don't know what you are talking about regarding million dollar jobs. A cite would be useful here. However, I can say that the country would be far ahead if we insulated all the leaky houses in the country. The savings on imported oil would be absolutely HUGE. We could take some money from Pentagon spending which supposedly protects our sources of energy.
Ok, now about the quantitative easing. Here we have common ground. $1.3 trillion in purchases of securities from the banks. Where did that money go? Why into speculation in commodities, mostly. Many economists say this. Inflationary. Of course, but we get nothing for the inflation. Here it would have been better to spread that money around to the tune of $4,000 per capita.
That would get you the down payment on that new truck, Tim. Some autoworker would be working a few extra shifts. He could maybe afford to insulate his house. The contractors and their workers would have some extra dough. Maybe the workers would take the wives to dinner. The restaurant would hire more waiters. Etc. etc. At each stage, the government collects taxes, pays less in unemployment insurance, medicaid, costs associated with crime and blight associated with deteriorating neighborhoods due to unemployment. The bottom line is that REAL wealth has been created by people applying their labor to tools. Not the phony wealth "created" by asset bubbles.
Stefan Stackhouse| 10.25.11 @ 9:08AM
It is just Bastiat's broken window fallacy, except that these days we don't even bother to break the windows.
Say Baptist| 10.25.11 @ 9:14AM
50 years ago many economists were losing there belief in Keynes. As more and more people crunched the numbers it became clear that the "Multiplier" as a fraction would hurt rather than help. As Keynes said, It would take a couple of generations for the layman to catch up to the economist.
race_to_the_bottom| 10.26.11 @ 9:49PM
I described in my reply to Tim how a Keynesian stimulus should work, but unfortunately the process is short circuited in the US because jobs which create value are scarce here and a stimulus tends here tends to stimulate the economy in China and other places where goods are manufactured. This is a result of the short sighted policy of offshoreing production.
Indiana Alex| 10.25.11 @ 9:18AM
No No No No No No No No No No, I can agree with the premise, but not the analysis.
First, the suggestion that a dollar of gov't spending will produce more than a dollar of private spending is silly in and of itself. To suggest that sending unemployment checks is stimulating is an exercise in complete ignorance.
The obvious characteristic of government "stimulus" spending is that decisions are made for political rather than economic motivations. All the "green energy" crap goes in this catagory.
Also, much of the stimulus went to support states that had made bad decisions with respect to their budgets, so the stimulus money simply put off their day of reconing.
This of course leaves out the opportunity cost of where this captial would have been spent, had the government not thrown it down a rat hole.
The dynamics can go on and on, but the more we get hung up on the amont of debt these policies are causing rather than the direct productivity losses associated with government throwing darts, the longer we move on as a nation of economic ignorance.
cicero| 10.25.11 @ 11:31AM
If you remove the shuffleing of money between banks, and payment of government wages from the GDP (as neither produce anything remotely resembling "product", you get a realistic idea of how productive this country is. By including them, government can live on the fiction that this country can afford its foolishness. This cannot last much longer.
buckeyeman| 10.25.11 @ 11:47AM
The fundamental force of any economy is productivity. That is, creation of goods and services that people desire. "Money" or "currency" are simply representations of those goods or services. The "smartest" folks in the world seem often unable to grasp this simple concept and throw numbers and statistics around in pretense that they actually mean something on their own. Their motive is usually personal gain but often it is driven by irrational leftist ideaology.
RJ| 10.25.11 @ 3:47PM
Exactly. Currency is simply a facilitator for trade. It is not wealth. If we can depoliticize our currency and establish it on a stable value basis, we can get rid of a lot of the financial tricks ("stimulus") which distort the economy. Of course, the distortions are not accidents. They make many politically connected interests very wealthy.
Dave| 10.25.11 @ 2:06PM
The government will have to forgive some debt to relieve the same stress on the public. Debt such as student loans would be a good place to start, though I suggest it be done by a non-racially slanted, non-immigrant favoring neutral agency. I'm a little more than sickened by the reverse discrimination that is passed off daily and the opportunity to exploit student loan debt by the same groups who have exploited everything else would be high.
Mike 3/505| 10.25.11 @ 2:26PM
We don't need to get rid of GDP as the measure of our economy. We just need to put government spending on the correct side of the equation. If the government spends money it is not an "adder" to GDP. It is a negative. Every 100 dollars spent by the government requires either 500 dollars of taxpaying private sector earnings or borrowing at whatever percentage. Any way you look at it, it is a negative.
Economics is a lot like physics. There ain't no perpetual motion machine.
Regards,
Mike
Sam Vaughn| 10.25.11 @ 2:33PM
Well said. I've argued till the "cows come home" that you can't spend your way out of debt, public or private.
Pat| 10.25.11 @ 6:25PM
As evidenced on websites like TAS, many Conservatives are quick to ennoble their political opponents by assuming some out worn economic theory or misguided philosophical notion is the actual basis for the problems our country is experiencing - and has been experiencing these past several decades. They can analyze a Soylandra style $500 million giveaway of taxpayer funds and naively assume it’s merely a complete failure of Keynesian ideology. The alternate explanation, concluding it was another expensive swindle perpetrated on the American public by a corrupt kleptocracy of Washington insiders, is very difficult to acknowledge. Our political process is habitually characterized as opposing but sincere opinions of where this country should be going, of divergent but honestly held “visions” of what America should represent. And all these typical characterizations constitute very uplifting sentiments but, at the same time, are also utter nonsense.
Our political system has consistently evolved and not in a healthy direction. The unimaginably vast sums our multi-tiered governments take in go for the personal enrichment of our political masters, their relatives and cronies. And that’s not something pleasant to contemplate or a reality which conveniently fits into our perennial American optimism regarding the effectiveness of our form of government. But just the same, all the available evidence points to a corrupt class of politicians who consciously, or perhaps unconsciously, identify their continuing well-being as justly deserved and their personal wealth building as the rightful fruits of their political labors. We can continue under the delusion our Liberal opponents have been innocently hoodwinked by a rogue economic theory or admit we are voluntarily supporting a failing political system rapidly spiraling into a pattern familiar to citizens of the old Soviet Union. We could admit to that harsh reality but then, perhaps, maintaining the dream is preferable to a rude awakening.
Mike Hawk| 10.25.11 @ 8:33PM
The political system isn't failing, it is the corrupt power seekers and their cronies that are corrupt. Men and women of virtue and character are attacked and demeaned by those who fear being exposed for the corruption they feed on. It takes educated and fearless voters and leaders to restore respect and honesty into the political system or all is lost.
CalMark| 10.25.11 @ 10:43PM
Exactly, Pat. As I was reading this I was thinking, "Why do conservatives always give their enemies the benefit of the doubt?"
Our enemies always paint us as evil, greedy, vicious, and hateful. Time we stopped being gentlemen, much as spineless wimps like Boehner, McConnell, and George W. Bush might like us to be (my blood pressure is going 'way up just thinking about those RINO clowns).
We don't have to make bad things up about our enemies. The facts are bad enough, and they scream like stuck pigs just when we quote their own words back at them!
Stop pretending everyone is nice, conservatives! Get a spine, GOP!
POST American| 10.25.11 @ 10:50PM
--------------------BOTTOM LINE----------------------
----------HUAC meets NUREMBERG 2012----------
------------TICK -----TICK ---TICK---TICK!
Howard| 10.26.11 @ 2:06PM
I could accept Keynesian spending if it was invested in potentially viable projects such as roads, etc. At least an asset is being procured. However, most stimulus goes into sugar high fixes such as temporary tax cuts. These are worthless. Politicians love to show that they are doing things; even if they are wasted.
Ground Control| 10.26.11 @ 9:53PM
Public roads are an expense, not an investment. A necessary expense, but an expense nonetheless.
race_to_the_bottom| 10.26.11 @ 10:43PM
I think that maintaining a road is an expense, but building a new one is investment.
race_to_the_bottom| 10.26.11 @ 9:56PM
Indiana Tex sez, "the suggestion that a dollar of gov't spending will produce more than a dollar of private spending is silly in and of itself"
You MAY have a point, but what if there IS no private spending?
What is REALLY silly is to talk about "lost opportunity" of capital. The county is AWASH in capital, both held by banks and $2 trillion held by non-financial corporations which cannot invest because of lack of demand.
POST American| 10.27.11 @ 12:10AM
----------------TICK! -------TICK! -------TICK!
wedding dresses | 11.14.11 @ 3:13AM
Our enemies always paint us as evil, greedy, vicious, and hateful. Time we stopped being gentlemen, much as spineless wimps like Boehner, McConnell, and George W. Bush might like us to be (my blood pressure is going 'way up just thinking about those RINO clowns).