Tuesday, November 16, 2010

Stimulus Spending

I have lefties try to tell me periodically that last year's stimulus bill did work, or perhaps it would have worked better if only we'd spent more. Well, lefties like Harvard, so let's see what these Harvard guys have to say, courtesy of Reason:

The stimulus isn’t working because it is based on faulty economics. Using historical spending data, the Harvard economist Robert Barro and recent Harvard graduate Charles Redlick have shown that in the best case scenario, a dollar of government spending produces much less than a dollar in economic growth—between 40 and 70 cents. They also found that if the government spends $1 and raises taxes to pay for it, the economy will shrink by $1.10. In other words, greater spending financed by tax increases hurts the economy. Even if the tax is applied in the future, taxpayers today adjust their consumption and business owners refrain from hiring based on the expectation of future tax increases, which worsen the economy today.

There are other reasons the stimulus bill has hurt rather than helped the economy. Four of every five jobs reported “created or saved” are government jobs. That’s far from the 90 percent private sector jobs the administration promised. Also, the Department of Education claims it has “created or saved” at least seven jobs for every job “created or saved” by any other agency. In other words, federal stimulus funds have been used to keep teachers on state payrolls. By subsidizing public sector employment, the federal government is getting in the way of addressing the issue of overspending in the states.

7 comments:

maxutils said...

Anyone who's ever taken a basic macroeconomics course knows this. I can think of only one time when and told everyone to go spend it -- but, that was to head off a potential crisis, not fix a problem, and it was more about maintaining consumer confidence than 'creating' anything.

allen (in Michigan) said...

Since the results are hardly more then the official stamp of approval on common sense the larger, and more urgent, question is why Keynesian pump-priming still has so many adherents.

MikeAT said...

Darren the only thing that makes me wonder of the validity of this report that the stimulus is the greatest waste of money in history...the fact Haaaaaaavard said it. Reality and the Ivy League don't meet often but someone here said something right.

mazenko said...

I'm starting to agree with you on this one. Of course, 40% of the bill was tax cuts and credits, so I don't know what that proves.

Darren said...

http://www.realclearmarkets.com/blog/519.pdf

Start on page 6/11 to see about these tax cuts and credits. They were targeted all right, but not in a way to do any economic good. The author is in the Dept of Economics at Harvard....

You've got to do more than just say "tax cuts" to prove your point....

Anonymous said...

Sure. That's because trickle down doesn't work. The best stimulus effect--sorry, conservatives, this has nothing to do with morals--is from giving money to the poorest people.

Why?

It's actually pretty simple to explain. Rich people don't spend all their money; they save some (or most) of it. Unfortunately, extra money which goes into savings has little to no effect on stimulus. You need it to be spent, preferably as many times as possible before it ends up in an investment.

Give a $100,000 tax cut to someone who is worth $10 million, and she may not change her spending habits at all. Similarly, if I picked up an extra $500 I wouldn't spend it locally; I'd probably put it in my IRA.

But unlike the multimillionaire, poor people don't save. Not because they're amoral, but because they can't. If you give $1 to each of $100,000 people who don't otherwise have enough money to buy food for their kids, they'll spend all of it. Even better, they'll often spend it in low income places, giving the money to others who (like the initial recipient) tend to spend rather than save. And then THOSE people will spend their money. And so on.

See, e.g.,
http://money.cnn.com/2008/01/29/news/economy/stimulus_analysis/index.htm

When it comes right down to it, things like food stamps and housing subsidies are true "double duty" benefits because they always, always, get spent, and they have more potential transactions before their final destination. The closer you are to the top of the money chain, the fewer transactions you're likely to have before the money gets locked up in an investment.

Sure, there's a moral argument about feeding people. Have you ever tried eating on $1/day? That's a real benefit as well. But I know you folks don't like to think about hungry folk, so I'm sticking to practicality here. The real question is whether you'll let your dislike of "liberal" stuff cloud the reality of potential stimulus.

Darren said...

You didn't read the report. Much of the give-away was to poor people, which, if I can interpret, was more like giving a fish than teaching to fish. It didn't do anything positive for the economy. See page 6/11 of the report by the Harvard economist, URL in my previous comment just above.