Economic Stimulus: More Harm Than Good

My thoughts on economic stimulus were published in the Oregonian.  If you read the column on their web site, you get to see their readers' comments.  If you're too lazy to hit a link, here's the article:

Expediency over economic need speeds stimulus

by Bill Conerly, Guest opinion

Saturday January 10, 2009, 6:38 PM

Bill Conerly

More harm than good. That's the sad case of the economic stimulus proposals from Gov. Ted Kulongoski and President-elect Barack Obama; they reflect political expediency rather than economic need.

The argument for public works projects or other fiscal stimulus is much weaker than our political leaders suggest. Classroom explanations of stimulative policy talk about "multipliers" of four or five -- meaning that each dollar we spend leads to four or five additional dollars in the economy. The best empirical estimates are much lower, with some economic research finding trivial net gain.

Stimulus effects are temporary. The old metaphor was "priming the pump," suggesting that a small amount of water added at the right time could lead to many gallons coming out later. The better analogy is pouring liquid into a toilet: It adds a little to the water level now but is soon flushed away.

Remember the stimulus checks that the IRS mailed out last summer? Can you feel them stimulating the economy today? No, neither can I.

The timing of fiscal stimulus is usually too late. The fastest we could expect to see any stimulus spending is the second half of this year, and even that would be pushing the bureaucracy and planners pretty hard. By that time, though, the economy will be expanding anyway.

The consensus of the economic forecasting profession, as surveyed by the Philadelphia Federal Reserve and The Wall Street Journal, is that economic growth will resume this summer. This point may need some explanation, because many of us have trouble believing that things will ever be different. (Digging out from a major snowstorm it's hard to believe that we'll be sweltering come August.)

Here's how the economic recovery will unfold. First, the economy tends to be self-correcting. If not, we would have spiraled out of control many times already. Second, the Federal Reserve has pushed a tremendous amount of stimulus into the economy. There's a long time lag between cause and effect, but monetary policy always works -- it just appears not to be working for months before it finally kicks in. Third, consumers are cutting their spending disproportionately to the decline in incomes. Eventually, the money they are saving will burn a hole in their pockets, leading to a resumption of spending.

At the state level, stimulus efforts run into another problem: leakage. A good deal of the money we spend in Oregon goes out of state, even out of country. Not only do we buy steel and cement from companies in other states, but we even buy labor from outside of Oregon. One of the engineering contracts for Oregon's bridge rebuilding program went to a Dutch company. If you want to see the stimulus, take a trip to Amsterdam.

What's the harm in trying? After all, our estimates of the timing of recovery, the multiplier and the other issues are somewhat uncertain. However, there's good reason not to go overboard. Spending decisions should result from a vigorous debate about costs and benefits. When the president or governor plays the recession card, he's trying to short-circuit that debate.

Let's talk about the most cost-effective way to solve our transportation challenges rather than railroading a spending bill through the Legislature.

Errors in stimulus decisions are damaging to our economy. Wasting resources on poorly conceived projects leaves us worse off. Borrowing money now will slow growth in the future. The recession is no justification for bad public policy.

Bill Conerly is the principal of Conerly Consulting LLC and chairman of the board of Cascade Policy Institute.

Comments

[Laurence Hunt]

Hear! Hear! Well said.

[Alan]

The limitation of the stimulus package is very well described in this post. However, we are dealing with a global recession and nearly all the major economies of the world are implementing a stimulus package. So, the overall effect could very well mitigate the effect of the recession/depression.

[Stan Ash]

One side of the stimulus package that has not been answered is what borrowing one trillion dollars will do to the credit markets. Since money is a finite amount, will not the government taking one trillion out of the market force the cost of money up?

[bill]

So what is the source for all of this government induced "investment"? Isn't it all borrowed money? Why do politicians have this unending need to spend money they don't have? Seems to me we have finally produced enough ignorant citizens who actually believe there is something for nothing-so long as government is involved!

It doesn't take a Phd to figure out what happens when a government balloons the money supply beyond the productivity gains in the economy. Deficit spending (borrowing) creates more dollars chasing the pool of goods and services.. resulting in an inflationery effect on "prices". The fiat currency becomes less and less valuable. Interest rates rise. costs go up. Remember the Carter years? How fun.

Now we see the same sort of ignorant policies being rammed down our throats, only this time the spending is for leftist pet projects that would not see the light of day in years past. Now, support of every kind of pork is on the table, including all manner of outrageous "investments". Priorities like killing the unborn, financing ACORN, rewriting history textbooks to conform to a 'new reality".. and much more.

This "stimulus" is nothing but a grab by the left to create "change".. that none of us should live with.