Stimulus spending doesn't stimulate economic growth, new Heritage study finds
By: Mark Tapscott
Editorial Page Editor beltway-confidential
01/06/10 1:42 PM EST
Government stimulus spending programs have never stimulated sustained econonic growth, according to a new study by the Heritage Foundation's Brian M. Riedl.
By way of introduction, Riedl points to these six instances of massive governmnt spending designed to stimulate economic growth and the similar results seen in each case:
* During the 1930s, New Deal lawmakers doubled federal spending--yet unemployment remained above 20 percent until World War II.
* Japan responded to a 1990 recession by passing 10 stimulus spending bills over 8 years (building the largest national debt in the industrialized world)--yet its economy remained stagnant.
* In 2001, President Bush responded to a recession by "injecting" tax rebates into the economy. The economy did not respond until two years later, when tax rate reductions were implemented.
* In 2008, President Bush tried to head off the current recession with another round of tax rebates. The recession continued to worsen.
* Now, the most recent $787 billion stimulus bill was intended to keep the unemployment rate from exceeding 8 percent. In November, it topped 10 percent.
Government stimulus spending programs haven't worked historically because the economic theory on which they are based is fundamentally flawed, according to Riedl. For example, he challenges the longstanding notion from Keysian economics that for every dollar of added government spending, $1.50 in new economic activity is created:
"If deficits represented 'new dollars' in the economy, the record $1.2 trillion in FY 2009 deficit spending that began in October 2008--well before the stimulus added $200 billion more -- would have already overheated the economy. Yet despite the historic 7 percent increase in GDP deficit spending over the previous year, the economy shrank by 2.3 percent in FY 2009.
"To argue that deficits represent new money injected into the economy is to argue that the economy would have contracted by 9.3 percent without this 'infusion' of added deficit spending (or even more, given the Keynesian multiplier effect that was supposed to further boost the impact). That is simply not plausible, and few if any economists have claimed otherwise."
Riedl adds that "this is no longer a theoretical exercise. The idea that increased deficit spending can cure recessions has been tested repeatedly, and it has failed repeatedly. The economic models that assert that every $1 of deficit spending grows the economy by $1.50 cannot explain why $1.4 trillion in deficit spending did not create a $2.1 trillion explosion of new economic activity."
This is an important and timely examination of a critically important issue, and it warrants serious study by opponents and proponents of new stimulus spending initiatives alike. You can read it in its entirety here.
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