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The Verdict Is In On the Economic Stimulus Bill

I love to watch The Kudlow Report on CNBC because his show is absolutely fascinating and what I call information rich. Larry Kudlow has worked toward but never actually earned his Ph.D. in Economics, worked for the Federal Reserve and was an economic advisor to President Ronald Reagan. He is a great interviewer, though a bit effusive, and has on some of the best minds in the economics and investment world on his show. I promise not to do such intricate articles too often, but this is worth the attention.

Recently, he did a brilliant piece on the Gross Domestic Product (GDP) numbers released just recently by the government. The GDP measures the growth (increase) or contraction (fall) of the economy overall and is a good measure of the last three quarters of economic activity in the USA up to Quarter 1 of 2010. I couldn’t help but bring this item of utmost importance to the attention of the public, even if it is, after all, economics.

Kudlow concludes that US government spending in the trillions of dollars has had zero impact on three quarters of GDP growth since the bottom of the Great Recession this last summer, thus making the case that the Obama Administration fiscal spending has had NO impact on GDP growth. His take on this is that despite the Keynesian theoretical underpinnings that government can fill in for decreasing demand from other sectors such as consumers and businesses in a situation of falling GDP, this process has failed because the stimulus was largely a transfer of wealth and therefore did not create a single job.

Unemployment has gone up since the passage of the stimulus package around March, 2009 even though the Obama Administration promised at that time that the problem of unemployment would worsen beyond 8% if not quickly passed and would not worsen beyond 8% if quickly passed. This has created a great experiment whereby a policy idea has been tried with a prediction that can be either proven true or false. The fact is, it has now been proven false. Unemployment hovers just under 10%.

It is true that the employment figures are improving, and we can look to see them improve more, but there is no mistaking two important points about this:

Firstly, the improvement is anemic by the standards of other historical recessions whereby the ensuing quarters from the bottom of a recession have been sometimes double what we are seeing now. Things are improving, yes, but at a much slower pace than we have experienced in the past. The differences between then and now are numerous, but the salient point is that the fiscal stimulus has failed to produce jobs commensurate with other recoveries not having the advantage of nearly a trillion more dollars in government spending. The Keynesians, such as Robert Reich, counter argue that the economy would be much worse without a stimulus bill and that an anemic recovery would have been even more anemic, or worse, have higher unemployment and even a still worsening recession. That would be a fine counter-argument except for the inconvenient fact that the GDP numbers show the government portion of growth in GDP was zero. Consumers bought more, largely as a result of transfer payments to them, and businesses restocked depleted inventories, or sold capital equipment to foreign emerging markets such as China, but government grants largely failed to provide jobs.

Second, the stimulus may yet provide jobs, but so far it has largely failed to prime the job pump as promoted originally. Recently, the Boulder Daily Camera carried a story about a Longmont firm making parts for electrical cars that got a visit from VP Joe Biden since they obtained a $45 million dollar grant out of the stimulus bill. The telling of their story is that they are supposed to increase from the present 70 jobs to 300 jobs for their business by Fall 2010 and they said the area could see a 2,700 person increase in employment in their firm when fully built out. The Camera’s online version of this article, later, did not refer to the 2,700 jobs at all. Why did the Camera take this figure out? They gave no timetable for this 2,700 jobs anyway, which means it would not be immediately if at all. Obviously, this is not a business plan on fire and not creating many jobs since March, 2009 for its $45 million dollar cost. I might note also that this is to an industry favored by the Obama Administration and apparently, not necessarily by the markets. Nevertheless, this example is a microcosm of the problem. The government makes the choices, handing out grants, rather than markets shifting capital to its best use. Bureaucrats simply are not entrepreneurs and governments are prone to playing politics with other peoples’ money.

This point still stands even if you hate Wall Street.

The myth is that government can simply step into the breach of a contracting (falling) GDP and push stimulus money to prop up employment. The reality is more complex because economies are systems whereby its parts interrelate. Some intervention in one part causes a problem somewhere else that undermines the original attempt. I might hasten to add that this is really just a taste of the problem, and not the intent of this article, because that would have to be developed in its own piece.

What I am trying to relate here is simply that we have in the recent GDP accounting, numbers that provide strong evidence that fiscal stimulus in general is not good public policy and specifically that the March, 2009 stimulus had no impact on the recovery. THE RECOVERY IS UNDERWAY, BUT THE STIMULUS HAD NO ROLE IN MAKING IT HAPPEN. By the way, I am not saying the same thing about the TARP funds, which was a monetary action initiated under President Bush’s watch, and not Obama’s idea. That is still fodder for another article.

You can catch part of Kudlow’s explication of this here.  Unfortunately, it picks up right at the end of Kudlow’s teaching moment.

About Stan Kreis

Stan Kreis
Stan Kreis has degrees in sociology, economics and accounting. Therefore he is wise, literate, financially sound and married to Kathryn Bernheimer (she would never marry anyone without such credentials). Grave marker: "the world was his oyster, unfortunately, he ate it and got stomach cramps."

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