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Why Did the “Stimulus” Fail to Help the Economy?
Spending Money Does Nothing to Address the Economic Factors Causing a Recession
When Congress was debating President Obama’s proposed “stimulus” last year, two of the watchwords for the near-trillion-dollar boondoggle were “jobs” and “shovel-ready.” Now, given what comes out of Washington, one needs a shovel to clean up the muck, and I appreciate the politicians and the media telling us we needed to have our shovels ready.
Now that the numbers are in, however, it seems that money spent had no appreciable effect on lowering unemployment:
A federal spending surge of more than $20 billion for roads and bridges in President Barack Obama’s first stimulus has had no effect on local unemployment rates, raising questions about his argument for billions more to address an “urgent need to accelerate job growth.”
An Associated Press analysis of stimulus spending found that it didn’t matter if a lot of money was spent on highways or none at all: Local unemployment rates rose and fell regardless. And the stimulus spending only barely helped the beleaguered construction industry, the analysis showed.
Keynesians, not surprisingly, have an answer: The government did not spend enough. They reason that economic growth can occur only if “aggregate demand” is great enough to prevent an overall “glut” of unsold goods. (Like the mercantilists before them, Keynesians believe that recessions occur because businesses cannot sell all the goods they produce. Socialists similarly claim that workers are “unable to buy back the products” they make.)
Therefore if government is to prevent the recession-causing “glut,” it must spend whatever is necessary to cover any “shortfall” in private consumption and investment spending. Out of this “theory” we get the present “stimulus,” complete with the blessing of Ivy League economists (who seem to perform the role of the High Priests in today’s political economy).
Such a “theory,” however, is doomed to fail every time, and I wish to give some reasons why.
- Individuals are purposeful creatures, so their spending also will reflect their own purposeful behavior. (It is interesting that many people who endorse the “aggregate demand” terminology also decry what they see as “mindless consumption of the masses.”)
- The economy is not a blob into which one stirs in money the way one stirs in an ingredient into a cake. In other words, the economy does not have a “just add money” in a recipe. It is driven by people making purposeful decisions.
- An economy has a structure of production that when working well directs resources, labor, and capital toward those areas of production that reflect the desires and needs of consumers.
- When governments expand money through the central bank, the rush of new money distorts the production structure and changes the relative value of assets and factors of production. In the early stages of this government-inspired boom, the malinvested assets (the ones that become more valuable as a result of the artificial boom itself) expand relative to other assets.
- The credit-fed boom ultimately cannot be sustained, and it becomes painfully clear that malinvested assets (see the housing-real estate bubble) quickly lose their value relative to other assets. This is the beginning of the recession, which is a period in which the economy begins to reassert the “consumer-preferred” value of economic assets.
Attempts to “stimulate” the economy through massive government spending may put money into the pockets of politically connected people, but it does nothing to restore the economic factors to their proper balances. Instead, the “stimulus” only serves to further distort the economic fundamentals and prolong the downturn.
That’s right. The stimulus has not staved off a major depression; instead, it has ensured the greater likelihood of a major economic collapse by keeping the factors unbalanced and distorting the structure of production.
The fact that the “elite” economists ignore (or even mock) what is known as the Austrian Theory of the Business Cycle does not change the fact that it explains why the Keynesian “solutions” are making things worse. Government can no more end a recession by pouring new money into the economy than one can end a fire by pouring on gasoline. But it can burn down our economic house.
Comment by Don on 20 January 2010:
the party is over for the Keysians. Let the revolution begin.
Comment by Kent Lalley on 20 January 2010:
Dr Anderson,
Nice job and thanks. Tu ne cede malis sed contra audentior ito!
“No one should expect that any logical argument or any experience could ever shake the almost religious fervor of those who believe in salvation through spending and credit expansion.” – Ludwig von Mises.
Kent Lalley
Somerset, PA
Pingback by Why Did the “Stimulus” Fail to Help the Economy? « thak’s cool links on 20 January 2010:
[...] The Freeman | Ideas On Liberty » Why Did the “Stimulus” Fail to Help the Economy?. And there you have it. Short, sweet, and directly to the point. [...]
Pingback by Rebellion News on 25 January 2010:
[...] Why Did the “Stimulus” Fail to Help the Economy? [...]
Comment by Robert on 26 January 2010:
I have come across another factor that actually has a logical explanation – the overall mood of the people. When the people in the economy herd more or less toward optimism or pessimism, consumer preferences and purposes themselves change. Mood influences action, including consumer confidence over whether they could pay back borrowings if they were to do so, or whether they would prefer to hold greater cash balances, among other things. As Socionomics explains, social mood is endogenous, driven by human herding, which is impervious to external events. When optimism waxes, people (including capital owners) are in the mood for expansion, and economic activity picks up. The reverse is also true – when optimism wanes or pessimism waxes, people move increasingly to conservation, economic activity slows down, and we see recessions and depressions. And as mood changes, different things start to matter. Virtues are focused on during increasing optimism while faults (like malinvestments) get overlooked or ignored, while faults gain the focus during pessimism while the virtues get overlooked, ignored, or denied, for one. There’s an article that should come up at the top of a search for “What happens during a bear market” which explains more.
Pingback by Three Million Imaginary Jobs - Page 3 - Political Forum on 19 July 2010:
[...] Good grief Frodly. Shall I counter with right wing blogs and think tanks that way the opposite? http://www.thefreemanonline.org/colu…timulus-fail/# http://thehill.com/blogs/congress-bl…imulus-fantasy [...]
Pingback by Suckered another liberal into a debate « Random Stranger on 6 April 2011:
[...] http://money.cnn.com/2010/04/26/news/economy/NABE_survey/ http://www.thefreemanonline.org/columns/not-so-fast/stimulus-fail/ [...]
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