Monday, August 6, 2012

An expensive leap of faith

In his recent Wall Street Journal piece, economist Art Laffer takes a look at the effects of "stimulus" spending in countries around the world and concludes:
It worked miserably...
[T]hose with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.

The four nations—Estonia, Ireland, the Slovak Republic and Finland—with the biggest stimulus programs had the steepest declines in growth. The United States was no different, with greater spending (up 7.3%) followed by far lower growth rates (down 8.4%).
What I can't figure out is why this is a surprise to anyone. If your family was in severe financial trouble, would your solution be to max out your credit cards and go on a spending spree? Seems to me you'd do just the opposite: cancel the cable service, stop eating out so much, maybe look for a second job.

Yet a lot of Really Smart People keep telling us that the way to get out of debt is to borrow more money. Maybe I'm just not smart enough, but I gotta go with Laffer on this one:
[S]timulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).

Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a surefire recipe for less work, less output and more unemployment...  
In other words, the transfer recipient has found a way to get paid without working, which makes not working more attractive, and the transfer payer gets paid less for working, again lowering incentives to work.
I love that last sentence.

Our economy is dying and we desperately need to increase production, but somehow the answer is to punish those who are actually being productive and reward those who aren't? Well there's your problem!

But, the Really Smart People insist, there's a magic "multiplier effect" that somehow makes every dollar the government spends generate two or three dollars of output. Yeah, that makes no sense to me either. First, how does taking a dollar out of my pocket and putting it in yours make it worth more? And second, even if there is such thing as a multiplier effect, how come it only works when the government spends my money and not when I spend it? Good luck convincing me that some politician in Washington knows how to spend my money better than I do.
In reality, every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP.
Yep, exactly. The pool doesn't get deeper when you take water out of the deep end and pour it in the shallow end. (It actually gets shallower, because you're apt to spill some along the way.)

Take it home, Arty:
The evidence here is extremely damaging to the case made by Mr. Obama and others that there is economic value to spending more money on infrastructure, education, unemployment insurance, food stamps, windmills and bailouts. Mr. Obama keeps saying that if only Congress would pass his second stimulus plan, unemployment would finally start to fall. That's an expensive leap of faith with no evidence to confirm it.

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