Why I'm Wrong About the Stimulus

wrong.pngThe Recovery Act (AKA the stimulus, AKA Obamanomics, etc) was passed early in 2009, but it's still a central issue in the midterm elections: a weapon for the GOP and an albatross around many Democrats' necks.

Republicans have used our high unemployment rate to slime the $800 billion stimulus law and argue by extension that more spending will hurt, or at least not help, the economy. I've often presented reasons why I think the stimulus not only worked but was better designed than most people give it credit for.

Now, here's the other side: why I'm wrong about the Recovery Act. To find out, I spoke with Brian Riedl of the Heritage Foundation. An edited transcript follows:

Did the stimulus work?

No. My colleagues and I were on the record predicting that it would not work, not create jobs, not end the recession. This is no surprise. Nobody has ever spent their way out of a recession or depression before. There is no record of government spending ever ending a recession.

Why doesn't spending to raise demand work?

The basic problem is that proponents never ask where the money came from. Congress does not have a vault of dollars. Every dollar has to be taxed or borrowed out of the economy. You're redistributing demand. We borrowed $800 billion from one group of people and we're giving it to another.

How do you grow a weak economy?

The only way to grow the economy is to increase labor supply or increase productivity. Any government spending that does not increase productivity or labor supply will not work. You can say that government spending can increase long term productivity -- roads, for example -- but you only feel that productivity ten years from now. You're not creating productivity in the short term.

Hasn't productivity increased dramatically in the last year?

Productivity is up but not because of the stimulus. Productivity often increases during recessions because businesses are cutting back and forcing a lot of work out of their employees.

I've read a lot of third-party studies from the Congressional Budget Office and Wall Street banks that conclude the stimulus helped the economy and raised GDP by a few points in 2009. Why are they wrong?

They never actually examine the economy. You know what CBO did? They just took $787 billion and multiplied it by a multiplier. Since then, they've just recycled the same methodology. All they've said is: We believe on faith that $787 billion creates trillions in growth. There was no actual economic observation. The assumption is programed into the model. Their conclusions are meaningless.

If the stimulus isn't raising GDP, is it reducing GDP?

I wouldn't say the stimulus has hurt the economy. It has had no effect. If you borrow $100 from your son and give to your daughter, you're not creating wealth.

Where did our $800 billion come from?

It came from investors, and much of it came from U.S. banks and China. Total GDP is consumption, investment, government spending, and net exports. The money we took from investors hurt investment. The money we took from China means net exports will drop dollar for dollar. While we can point to the great things the government has done with the money they spent, we can't ignore the fact the it's creating a rising trade deficit and investment slump.

What about the argument that we borrowed from people who weren't spending? Maybe we borrowed $100 from a son who was just sitting on the money and gave it to a daughter who immediately went to the mall. Why isn't that good for the economy?

The other side often says: "But we borrowed from people who weren't spending. They were savings and we're putting money to work!" That assumes that savings drop out of the economy. Usually they are invested or the put in a bank that invests it. Unless we can prove that this money would have otherwise sat in a safe, all they did was move money around.


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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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