Obama Experience Highlights Failure Of Keynesian Gov't Intervention In Economy
The last four years eloquently indict the efficacy of government economic intervention. While long-term intervention has long been dismissed as ineffective, many still cling to a Keynesian hope that government intervention of limited duration could succeed.
Now the effectiveness of both short-term and long-term economic intervention seems questionable. Put simply: The last four years have cost an incredible amount, while returning very little ... beyond debt.
Federal spending has exploded, deficits have skyrocketed, the government's debt has doubled, but the economy remains stagnant.
In 2008, the federal government spent $2.983 trillion, a record to that point. A year later spending jumped 18% (to $3.518 trillion) and equaled 25.2% of GDP. There it has stayed. The Congressional Budget Office reported 2012's spending at $3.538 trillion, almost 23% of GDP.
The last four years' federal spending has averaged $3.5 trillion, roughly a quarter of everything America produces.
Only WWII rivals that level — there is no peacetime equal. Not until 2002 did the entire federal debt (held by the public) match the last four years' spending average.
Federal deficits have soared. In 2008, the deficit was $459 billion, the then-record. It has been more than double that ever since. In 2009, it grew by — not to, but by — almost $1 trillion, equaling 10.1% of GDP.
From 2009 to 2012, the deficit has averaged $1.3 trillion and almost 9% of GDP. Not only is that a peacetime overspending record, but total federal spending did not hit that level until 1991.
This deficit spending doubled federal debt in just four years. At 2008's end, federal publicly held debt stood at $5.8 trillion. CBO projects that at 2012's end, it will be $11.3 trillion.
In just four years, Washington will have accumulated almost as much debt as in its entire history — rising from 40.5% of GDP to 72.8%.
The federal government has spent, borrowed, and indebted like there was no tomorrow.
Regretfully however, there have been four years of tomorrows. Just not four years of economic results.
Those favoring government intervention call it "investment." This last four years' investment may have performed worse than any other in this current bear market.
In 2009, our economy fell 3.1%. In 2010, it grew just 2.4% and in 2011, 1.8%. CBO does not foresee improvement: This year CBO projects growth at 2.1% and 2013's at 1.7% — even without a fiscal cliff effect.
The 2009-12 average GDP growth has been 0.8%. Adding those four years' real GDP growth rates together would just equal 3.2% — a good normal annual GDP growth rate.
Even subtracting 2009's GDP drop, yields little improvement. Adding CBO's 2013 1.7% growth rate and you get a four-year annual recovery rate average of 2%.
That is the lowest four-year recovery rate (averaging real GDP growth rates following a negative growth year) since the Depression.
And it's the lowest by a lot: The average four-year annual recovery rate is 5.7% — with the next lowest period being 1954's 2.8%.
Unemployment has been just as dismal. According to the Bureau of Labor Statistics, 2008 annual unemployment rate was 5.8%.
In 2009, it reached 9.3% and 9.6% in 2010. While 2011's level was 8.9% and last month's 7.7%, both are more due to people leaving the workforce than recovery.
Long-term government economic intervention's ineffectiveness has long been known. Eastern Europe's state-run economies were abject failures for decades.
In our own experience, western nations' foreign aid programs have fared no better.
Writes Nobel economist Gary Becker: "Given the distortions away from effectiveness on both sides of the donor-recipient equation, it is no surprise then most foreign aid has been at best ineffective, and at worst negatively affects the growth prospects of recipients."
However, many believe government economic intervention as crisis-management does work. The last four years argue otherwise.
Despite unprecedented peacetime fiscal effort — augmented by monetary stimulus holding interest rates at historic lows — the economy has dramatically underperformed.
Certainly, there could be reasons why government stimulus was once more effective.
In 1930, the federal government spent only 3.4% of GDP. It therefore was possible to triple it by 1934 to 10.7%, the New Deal's high water mark, at comparatively low cost. Contrastingly in 2008, Washington already spent double (20.8%) that 1934 level of GDP prior to the actual recession. Replicating past stimulus impacts may now be impossible because of government's high everyday impact on our economy.
Whatever the reason, the growing evidence of ineffectiveness of current concerted and unprecedented fiscal and monetary stimulus becomes harder to ignore.
Combined with the evident failure of long-term government economic intervention, the last four years poses serious questions as to when and how government intervention can be effective.
• Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004 and as a congressional staff member from 1987 to 2000. |
