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Wednesday, November 4, 2009

The “Stimulus” Stopped the Recession? Not So Fast!

A Stimulus Sequel Would Be a Flop

I don’t intend for this column to be a weekly response to Paul Krugman, but there are times he writes such outrageous things that I won’t be silent. The New York Times column of November 2 is one of them.

Krugman declares that the American Recovery and Reinvestment Act (the “stimulus”) has “worked,” but still is “not enough.” Its supposedly curative economic powers are described as such:

…not that long ago the U.S. economy was in free fall. Without the recovery act, the free fall would probably have continued, as unemployed workers slashed their spending, cash-strapped state and local governments engaged in mass layoffs, and more.

The stimulus didn’t completely eliminate these effects, but it was enough to break the vicious circle of economic decline. Aid to the unemployed and help for state and local governments were probably the most important factors. If you want to see the recovery act in action, visit a classroom: your local school probably would have had to fire a lot of teachers if the stimulus hadn’t been enacted.

Unfortunately, there is more from where that came: “The good news is that the American Recovery and Reinvestment Act, a k a the Obama stimulus plan, is working just about the way textbook macroeconomics said it would.”

Unfortunately, according to this star of Princeton University’s all-star faculty, the near-trillion dollars of this program, which came entirely from borrowing and printing money, must have a sequel — or the U.S. economy will have high unemployment for years to come. The only thing that can “save” us is another round of borrowing and printing.

The effects of the stimulus will build over time — it’s still likely to create or save a total of around three million jobs — but its peak impact on the growth of G.D.P. (as opposed to its level) is already behind us. Solid growth will continue only if private spending takes up the baton as the effect of the stimulus fades. And so far there’s no sign that this is happening. [Emphasis added.]

So the government needs to do much more.

Stuff like this demonstrates just how much the Times editorial page has fallen since the days when Henry Hazlitt was penning editorials for the Gray Lady. So where do we begin? We begin by explaining something about a real economy, not a creation of the Keynesian textbooks.

An economy is not a “blob” into which people pour money, the Keynesian view. It is an intricate combination of factors of production which individuals harness to meet the real needs of real people. It is a process constrained by the law of scarcity, which means that the workings of an economy – if individuals are permitted the freedom necessary to make it work – are going to be directed toward individual needs.

Factors used for one purpose cannot simultaneously be used for something else, and it matters that these scarce factors be directed properly. Unfortunately, the dominant thinking among professional and academic economists is that the economy is an empty tank into which one pours the fuel of money and magically it “creates jobs” and goods. This is as nonsensical as Aaron’s explanation to Moses that the Golden Calf simply rose out of a fire after he threw a bunch of gold jewelry into it.

The “stimulus” has not “saved” anything. It has been a huge misdirection of resources from things that would meet real-live individual needs to those things that meet the “needs” of politicians to be reelected. As I noted in an earlier column, where I live almost half a million dollars was spent rolling sod onto a narrow median strip on I-68 near my home, an unnecessary and wasteful project if ever one existed.

Our economy is moribund because for many years the government and the Federal Reserve misdirected resources into lines of production that never could be sustained. While the boom lasted, things seemed to be great, but it now is time to pay the piper. Unfortunately, the politicians and intellectuals seem to believe that the “solution” is even more wasteful spending.

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.