Tuesday, 7 August 2012

“Stimulus” doesn’t stimulate


Whatever your view of arch supply-side economist Art Laffer—inventor of the Laffer Curve, and infamous as one of Peter Schiff’s adversaries in the months before the big crash who boneheadly refused to see the coming problems—whatever you think about him and his acumen, his piece examining the results of the last five years of government stimulus experiments is undeniably correct.

How did government “stimulus” work in the real world? His conclusion after studying the facts and figures: “In country after country, increased government spending acted more like a depressant than a stimulant.”

Of the 34 Organization for Economic Cooperation and Development nations, those with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.

That seems fairly conclusive.

The four nations—Estonia, Ireland, the Slovak Republic and Finland—with the biggest stimulus programs had the steepest declines in growth. The United States was no different, with greater spending (up 7.3%) followed by far lower growth rates (down 8.4%).image

…If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).

Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a sure-fire recipe for less work, less output and more unemployment.

It’s unsurprising that rewarding failure from the proceeds of those who are successful is hardly a recipe for making great gains.

Yet the notion that additional spending is a "stimulus" and less spending is "austerity" is the norm just about everywhere. Without ever thinking where the money comes from, politicians and many economists believe additional government spending adds to aggregate demand. You'd think that single-entry accounting were the God's truth and that, for the government at least, every check written has no offsetting debit.

Well, the truth is that government spending does come with debits. For every additional government dollar spent there is an additional private dollar taken. All the stimulus to the spending recipients is matched on a dollar-for-dollar basis every minute of every day by a depressant placed on the people who pay for these transfers. Or as a student of the dismal science might say, the total income effects of additional government spending always sum to zero.

“Stimulus” is a zero sum gain at best.

imageBut all of this is just old-timey price theory, the stuff that used to be taught in graduate economics departments. Today, even stimulus spending advocates have their Ph.D. defenders. But there's no arguing with the data in the table above, and the fact that greater stimulus spending was followed by lower growth rates. Stimulus advocates have a lot of explaining to do. Their massive spending programs have hurt the economy and left us with huge bills to pay. Not a very nice combination.

Sorry, Keynesians. There was no discernible two or three dollar multiplier effect from every dollar the government spent and borrowed. In reality, every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP. This is an even more astonishing result because government spending is counted in official GDP numbers. In other words, the spending was more like a valium for lethargic economies than a stimulant.

In many countries, an economic downturn, no matter how it's caused or the degree of change in the rate of growth, will trigger increases in public spending and therefore the appearance of a negative relationship between stimulus spending and economic growth. That is why the table focuses on changes in the rate of GDP growth, which helps isolate the effects of additional spending.

The evidence here is extremely damaging to the case made by Mr. Obama and others that there is economic value to spending more money on infrastructure, education, unemployment insurance, food stamps, windmills and bailouts. Mr. Obama keeps saying that if only Congress would pass his second stimulus plan, unemployment would finally start to fall. That's an expensive leap of faith with no evidence to confirm it.

There is no evidence, either empirical or theoretical, that “stimulus” stimulates.

But stimulunacy is not an economic theory. It’s a bout politics. Which is why stimulunacy will continue—right up until the pool of real savings runs out altogether.

[Hat tip Phil Hayward from NZ’s Foundation for Economic Growth]


  1. That's one very useful chart.

  2. Wow. Bad science overload.

    Problem 1:
    "But there's no arguing with the data in the table above, and the fact that greater stimulus spending was followed by lower growth rates"

    The chart actually shows "spending" levels. Not "stimulus spending", that pretty much invalidates most of Art's conclusions.

    Problem 2:
    This is ALL based on one time period, between 06/07 and 08/09. Remember how the world was hit with biggest financial crisis since the great depression during that period? Possibly that might have had an effect on GDP?

  3. @Joshwa: The spending levels it shows are all spending increases; spending well over and above income (which had tanked in the years measured). That's what so-called stimulus spending is: spending well above what you've earned in the hope something will come of it.

    Yes, the chart only measures one time period--I'd have measured longer myself. But the correlation between higher spending and greater contraction is a good one, and has a real causal explanation.

    Still, each country is different and had different circumstances going into the crash--but none found "stimulus" any use in extracting themselves from the mire. And that's the real point here, isn't it.

  4. If "stimulus" spending was not called that but "bargain basement buying" then it would make sense if the bargains were for actually useful things such as a motorway from Kerikeri to Puhoi and from Pokeno to Tauranga and to continue the southern motorway to Hamilton.

    I quite like recessions because I can buy things more cheaply and find people actually willing to do some work. I'm okay with road taxes too as built into petrol prices, except that is a very blunt instrument and useless as a congestion charge. Direct road charges based on how busy roads are, using photo/electronic/magnetic/radio identification and GPS would be a great way to raise taxes, while cutting taxes on income and sale of products and services.

    By diluting existing money and spending it on really useful things like roads, it enables governments to buy more for less than they can do during boom times when quotes for contracts are high. It also dilutes welfare payments because the money is competing with money received for no effort by welfare recipients. As the inflation bites, welfare recipients will come under pressure to get a real job as their dole won't go so far. Inflation dilutes the set minimum wage too, making it more likely that people will get actual jobs instead of sitting around resting on the production of other people. The Little Red Hen should be required reading for everyone on the dole until they can recite it by heart.

    Politics being what it is, with pandemic bludger mentality, politiicians would promise to raise the minimum wage and dole, so the gains would be ephemeral.

  5. Except for the fact that benefits are index linked.

  6. @Peter

    "Still, each country is different and had different circumstances going into the crash--but none found "stimulus" any use in extracting themselves from the mire. And that's the real point here, isn't it."

    That really hasn't been shown. What you'd need to show that is examples of comparable countries (i.e. developed) who implement austerity measures during the same time period and saw real increases in their growth.

  7. http://business.time.com/2012/08/09/arthur-laffers-anti-stimulus-curve-ball-is-a-foul/

    thoughts on this article?


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