Why Stimulus Fails: Keynesian Illusions Once Fostered Prosperity. Not Anymore

By Chip, William W. | The American Conservative, March 2012 | Go to article overview

Why Stimulus Fails: Keynesian Illusions Once Fostered Prosperity. Not Anymore


Chip, William W., The American Conservative


Nearly three years after Congress enacted a $787 billion stimulus package, the U.S. unemployment rate at the end of January stood at 8.3 percent--exactly where it was the month the stimulus passed and only half a percent below where the Obama administration predicted it would be if there had been no stimulus. This "mother of all stimulus bills" failed to deliver as promised. Ominously, hardly anyone agrees on why it failed.

Some Democrats have argued that $787 billion was not enough. Last fall the president called for a second stimulus package of $450 billion. Two days after the president's speech, Christina Romer, former head of Obama's Council of Economic Advisers, argued that a second stimulus should be "substantially larger." The president would have proposed more in the first place, and would probably have gotten his way, had Republicans not taken control of the House of Representatives in 2010.

Many Republicans have accepted that a fiscal stimulus was needed, but they argue that the money was spent on the wrong things and would have given a bigger boost to the economy had a larger portion taken the form of tax cuts. There is no shortage of anecdotal evidence about misdirected spending, such as a February 2009 report from the American University Investigative Reporting Workshop showing that 80 percent of renewable-energy stimulus funds had gone to foreign turbine manufacturers, creating about 6,000 manufacturing jobs overseas but only a few hundred in the United States. In a September 8, 2011 editorial, the Wall Street Journal, citing other evidence that stimulus spending was "poorly targeted," argued that "the economy would have benefited far more if the government had instead improved the incentives for people and businesses to invest, produce and grow," presumably through lower taxes and relaxed regulation.

Although many conservatives still have faith in fiscal stimulus based on tax cuts, libertarians and Tea Partiers have condemned the very notion of stimulus spending, whether delivered through tax cuts or federal handouts, believing that government deficit spending must always make things worse. For them, the Great Satan of deficit spending is John Maynard Keynes. In a 2009 MSNBC interview, when asked about the implosion of the mortgage markets, Congressman Ron Paul responded: "We've had inflationism, corporatism, big government. We've ... not had true free market capitalism.... Somebody asked me what individual is the cause of this problem? I would put them all on the shoulders of Keynes."

John Maynard Keynes, dead since 1946, was an economics don at Cambridge University who during the Great Depression advocated deficit spending by national governments to counteract unemployment. Although efforts by Depression-era governments to implement Keynesian stimulus programs were modest and of questionable effectiveness, Keynes's reputation was cemented by the experience of World War II, when deficit-financed war production generated unprecedented increases in output and employment.

Every American president since John F. Kennedy, without regard to political party, has taken for granted that the appropriate response to a sluggish economy is to enlarge the federal deficit--to increase spending without increasing taxes or to decrease taxes without reducing spending. Lest we forget, Congress authorized $130 billion of tax rebates during President Bush's last year in office in a futile effort to stem the nascent recession.

Conservative critics of today's Keynesian stimulus spending may be right, but not necessarily because Keynes was wrong. Unlike philosophy or physics, economics is a social science that seeks to explain the events of its time, not to reveal eternal verities. It may be that Keynes got the formula exactly right for the 20th century but that we have entered a new era in which his theory has become as obsolete as the classical 19th-century theories that Keynes himself debunked. …

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