Saturday, February 7, 2009

Federal Stimulus Package: Part One

Debate continues on the federal “stimulus package.” The House passed an $820 billion package last week that ballooned to over $900 billion in the Senate. Currently it appears that that might get trimmed to a “svelte” $780 billion. Regardless of what the grand total ends up being, as I see it, there are four reasons not to like the stimulus package: 1) It won’t work. 2) We can’t afford it. 3) It will be rife with waste, fraud and abuse. 4) It will drive up inflation. Let’s consider each of these in turn.
1. It won’t work.
The history of Keynesian “stimulus” is not promising. Daniel J. Mitchell, a Senior Fellow at Cato Institute, lists numerous examples of Keynesian failures. For instance Herbert Hoover, at whose feet the Great Depression is popularly laid, was no free-market libertarian. He increased taxes, imposed protectionism, and increased regulation of private markets. Most importantly to this debate, he increased federal spending by 47% in four years. None of these big government policies kept the Depression from knocking at the door.

Hoover’s replacement was the Keynesian poster child Franklin Delano Roosevelt. The New Deal wrapped federal tentacles around every aspect of private business. The top tax rate was hiked to 79%. FDR boosted government spending by 106% from 1933 to 1940. Still unemployment remained high and economic output didn’t recover until we ramped up during World War II. A recent study by Lee E. Ohanian and Harold Cole of UCLA suggests that New Deal policies prolonged the Depression by 7 years.

The Keynesian idea of tax rebates, wherein people are given money taken from other people, to stimulate the economy has been tried several times. President Ford tried it during the 1970’s and President George W. Bush tried it in 2001 and 2008, all with lackluster results. Bush was also the biggest spending president since LBJ, but his prolific spending apparently hasn’t helped the economy.

Mitchell also uses the experience of Japan to illustrate the folly of stimulus through government spending. He writes: “[T]hroughout the 1990s [Japan] tried to use so-called stimulus packages in an effort to jump-start a stagnant economy. But the only thing that went up was Japan’s national debt, which more than doubled during the decade and is now even far more than Italy’s when measured as a share of GDP. The Japanese economy never recovered, and the 1990s are now known as the 'lost decade' in Japan.”

I already wrote about the fallacy of job “creation” by public works projects in “Rebuild Iowa Wisely,” using a favorite passage from Henry Hazlitt, so I won’t rehash it here.

All these reasons and more led a group of 300 of the nations’ top economist (including 3 Nobel laureates) to sign on to a full page ad in national newspapers, denouncing Democrat’s bloated stimulus package. (See ad at the right.)

All signs point to this stimulus as being not only a failure, but a damned expensive one.

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