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Learning from Government Stimulus Failures

Monday December 19th, 2016   •   Posted by Craig Eyermann at 7:02am PST   •  

ARRASignAssembly In one month, Donald Trump will be sworn in as the 45th President of the United States of America. Shortly after he assumes office, it is widely expected that he will pursue a massive fiscal stimulus for government spending, similar in many respects to what President Obama did in his first month after being sworn in.

Since almost the entire economic legacy of Barack Obama’s presidency was set in its first month, when the American Recovery and Reinvestment Act (ARRA) was signed into law on February 17, 2009, it would be a good idea to consider what we learned from that experience.

The Obama administration proclaimed that the $830 billion measure would spark a Great Recovery to follow the Great Recession, generating enough economic growth through government spending to keep the nation’s unemployment rate from rising above 8 percent, as it would provide a long-lasting stimulous through higher GDP growth rates.

It didn’t work out that way. Writing at the Wall Street Journal on the fifth anniversary of its passage, James Freeman described the true legacy of President Obama’s stimulus program:

Five years ago today, President Barack Obama signed the American Recovery and Reinvestment Act into law. The $830 billion spending blowout was sold by the White House as a way to keep unemployment from rising above 8%. But the stimulus would fail on its own terms. 2009 marked the first of four straight years when unemployment averaged more than 8%. And of course the unemployment rate would have been even worse in those years and still today if so many people had not quit the labor force, driving labor-participation rates to 1970s levels….

Shortly after the passage of the Recovery Act in 2009, Vice President Joseph Biden urged local politicians not to spend the money on “stupid things.” They ignored his advice, and so did Mr. Biden. The federal government poured billions into the government and education sectors, where unemployment was low, but spent only about 10% on promised infrastructure, though the unemployment rate in construction was running in double digits. And some of the individual projects funded by the law were truly appalling. $783,000 was spent on a study of why young people consume malt liquor and marijuana. $92,000 went to the Army Corps of Engineers for costumes for mascots like Bobber the Water Safety Dog. $219,000 funded a study of college “hookups.”…

In aggregate, the spending helped drive federal outlays from less than $3 trillion in 2008 to $3.5 trillion in 2009, where federal spending has roughly remained ever since.

The legacy is a slow-growth economy: Growth over the last 18 quarters has averaged just 2.4% — pretty shoddy compared to better than 4% growth during the Reagan recovery in the 1980s and almost 4% in the 1990s recovery.

In 2012, ReasonTV conducted a case study of how President Obama’s stimulus package worked in the Washington, D.C., suburb of Silver Spring, Maryland.

The United States was not the only nation to attempt to use a government-spending stimulus program to boost economic growth during the period of the Great Recession, which was a worldwide event. The Centre for Independent Studies’ Robert Carling recently commented on a paper released by Australia’s Treasury Department on the apparent effectiveness of that country’s government stimulus programs from the same period:

A Treasury-released paper critiquing Australia’s fiscal stimulus during the global financial crisis of 2008-09 shows the flaws in the stimulus model, according to the Centre for Independent Studies (CIS).

“The paper by budget expert Professor Tony Makin highlights the limited effectiveness and longer term costs of Australia’s unnecessarily large stimulus in 2008 and 2009,” CIS Senior Fellow Robert Carling said.

“Professor Makin argues that Australia escaped the worst of the Global Financial Crisis because of our robust banking system, reduced interest rates, a lower exchange rate, demand for minerals, and a flexible economy, not because of the stimulus.

“In addition, Professor Makin argues the stimulus caused problems by preventing interest rates and the exchange rate from falling by more.

Instead of boosting Australia’s economy as it intended, the Australian government’s stimulus spending unnecessarily created additional headwinds for it.

Those aren’t the only parallels to the U.S. experience. Reflecting on the Australian government’s $43 billion (Australian dollars) stimulus in response to the Global Financial Crisis (GFC) for ABC News in 2011, Australian economist Steven Kates found it provided no positive contribution to Australia’s economy.

That ultimately we have come out of the GFC relatively better placed than others should be welcome but cannot be attributed to the stimulus which has left us worse off than if nothing had been done at all. That the Treasury and others badly and wrongly overstated the seriousness of the downturn that would eventually occur has added to the belief that something positive was done to save the Australian economy from what could have been much worse. The reality was that Australia was never heading for the slowdown Treasury foresaw and its panicked overreaction and subsequent over-the-top stimulus expenditure have served Australia very badly indeed.

And of this you may be sure. If recessionary conditions overcome Australia any time in the foreseeable future there will be no stimulus measures taken this time round. Whatever the Government may say, even it now knows better than to do the same thing again.

It is doubtful than any politician anywhere will ever truly learn that lesson. We’ll soon find out if President-elect Donald Trump is genuinely different by whether or not his incoming administration applies the lessons learned from the failures of “economic stimulus spending” by governments virtually everywhere in the world during the past eight years.

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December 2016