Government Stimulus Spending has Lengthened Recession
Posted by Steve Markowitz on June 10, 2011
When the 2008 financial meltdown occurred, politicians from both political parties panicked. Faced with a historic crisis, they turned to academic economists for solutions. These academics proposed all sorts of Keynesian solutions; i.e. government spending programs, to save the Country from economic Armageddon. The programs included:
- TARP, a bailout of the banks who played key roles in creating the economic crisis in the first place, and also a bail out of insurance giant AIG who made stupid business decisions that brought the world to the financial brink. These huge programs started the Country down the slippery slope that has led to us becoming bailout nation.
- The next major governmental intervention was President Obama’s Stimulus Package. With nearly $800 billion in government spending, Obama promised that this program will keep America’s unemployment rate under 8%. It subsequently hit 10%.
- Then there were the General Motors and Chrysler bailouts. Obama told the Country they were necessary to keep America working. Not only did it not achieve this goal, but during the forced bankruptcies the government changed the rules, cheating bondholders in favor of the auto companies’ union workers. This illegal governmental intervention into the bankruptcy laws will have consequences in the future.
- Since the government was bailing out banks and other companies, it had to give some candy to the people as well. It therefore continually extended unemployment benefits at the cost of tens of billions.
- The government also spent billions on the Cash for Clunkers program, giving owners of old cars rebates to purchase new ones. This program did not result in the sale of one additional car in the U.S. in the long run. It merely pulled from future auto sales.
- There was also the $8,000 tax credit for home buyers that cost tax payers billions. While it created a temporary uptick in home sales in 2010, the housing market is now in a double-dip recession with home prices continuing to depreciate.
- The government also offered other programs such as cash for appliance and $8,500 for buying Chevy Volts.
While the above list is not complete, it amounts to trillions of government stimulus whose results can now be judge. The verdict: a complete failure. Not only did the unemployment rate exceed 10%, it remains at over 9% today. Further, recent housing, jobs and manufacturing reports are once again heading south.
The governmental spending programs have failed because they can occur only at the expense of private sector spending and investment. Government spending can only come from taxes or barrowing. Both are offsets to any spending benefit. The wasted trillions have once and for all proved this reality.
With the Keynesian approach to addressing recessions disproven, what should the government do or have done? Jeff Jacoby of the Boston Globe published an interesting article today that suggests the government should actually cut spending to stimulate the economy (Slash spending and the economy will bloom). In support of this thesis he reviews the history of the economy just after World War II ended. At that time government spending dropped by over 50%, from $84 billion in 1945 to $30 billion in 1946. In addition, 10 million Americans were released from the military and needed to find civilian jobs. Finally, economic controls implemented during the War by the government were lifted. The economic results were astounding.
While many economists predicted doom with the huge drop in government and military spending after the War, the economy thrived. By 1947, the government ran a budget surplus of 6% of GDP. The unemployment was only 4.5% through 1948.
It is clear that the extraordinary government spending programs since 2008 have not helped the economy. As time marches on there in fact is growing evidence that it these programs instead inhibited economic growth. In order to stimulate economic activity (growth), the government needs to out of the way and allow entrepreneurs do their thing.