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Richmans' Trade and Taxes Blog
Why Pres. Obama's Economic Stimulus Has Failed
The Obama administration’s 2009 Recovery Act allocated $787 billion intended to stimulate the economy. To Keynesians spending is fungible and it does not matter what the increased spending is for so long as it is spent on goods and services. But as is evident from the data which appears on the government site, www.recovery.com, which is supposed to keep track of the Recovery Act’s progress, most of the expenditures were not for goods and services: $288 billion or 29 percent consisted of Tax Benefits and $224 billion, or 28 percent were for Entitlements. Thus more than half consisted of income transfers. The remainder was for Contracts, Grants & Loans to individuals, businesses, organizations, and governmental units. The payouts are continuing: 85 percent of the Tax Benefits have been paid out, only 54 percent of the Contracts, Grants and Loans, and only 73 percent of the Entitlements.
The vast majority of the Recipients of Recovery awards consist of state and local governments including school districts, universities and research institutions, NGOs (non-governmental organizations, and private companies. The Act looks like a list of ear-marks, a politically inspired set of expenditures and not of a recovery act. The President’s advisors learned nothing from the failure of Pres. Roosevelt’s “New Deal”. The CCC, WPA, and PWA, etc., etc. stimulated the economy but had no multiplier effects as the recession of 1957-58 showed. No one should be surprised that the Recovery Act, in spite of the billions already paid out, appears to have contributed little and, like the increased expenditures in the 1930s , will produce just a temporary increase in GDP and will likewise have no multiplier effects. But the Recovery Act faced another challelnge which the New Deal" did not, a growing trade defricit which drags down the Gross National Product and does have a multiplier effect.
The President has indicated his disappointment with the lack of so-called “shovel-ready” projects. But even if there were a great many “shovel-ready” projects, it would have no multiplier effects. That the economy will experience a double-dip in the GDP cannot be ruled out although it may be deferred by the billions still remaining to be paid out. Unfortunately, there was little in the Act to stimulate industry. Like the trade deficits, economists chose to ignore the fact that the large corporations were outsourcing the production of their new products. As Andy Grove, a founder and former CEO of Intel pointed out, Apple, HP, Dell and other innovators have ten times as many employees producing their products abroad than they employ in the U.S. Our commitment to unilateral free trade continues in spite of fifteen to twenty percent unemployment, counting those working part-time and those who stopped looking for jobs.
The President’s Council of Economic Advisors (CEA) noted in its quarterly report on the progress of the Recovery Act that reduced taxes are somewhat less stimulating than direct government expenditures. But that is not the reason for the Act’s meager stimulus.Nearly all of the Recovery Act allocations during the year 2009 went to enable state governments and school districts to meet their 2009 budgets. The federal funds just substituted for planned state and local expenditures.Some went to rebate programs designed to rescue the auto industry (the “klunkers” program) and the housing industry (rebates for first-time home buyers), and some for cash checks to households, a repeat of Pres. Bush’s taxpayer rebates in 2008. The results were disappointing. The hope was the recipients would spend their rebates but as Prof. Milton Friedman pointed out, household expenditures are mainly based on so-called permanent income. These were one-time events.
The President’s chief economic adviser, Prof. Larry Summers, and CEA Chairman Prof. Christine Romer, resigned at the end of summer 2010. They did nothing to set the President straight if they knew what was straight themselves.
The increase in GDP from the 2nd quarter of 2009 to the 2nd quarter of 2010 was $544.2 billion. Were exports equal to imports, the GDP would have risen $748.3 billion, roughly equal to the expenditures budgeted in the Recovery Act. The trade deficit reduced the increase in GDP of $748.3 billion to $544.2 billion or by 22.3 percent!
While the Recovery Act must be considered a failure because it did not increase GDP very much and can be expected to have no multiplier effect, its poor performance was exacerbated by the growing trade deficit. The Recovery Act was poorly designed and made worse by the reigning ideology, free trade. Indeed, we shall show how bringing trade into reasonable balance would have a multiplier effect and with the help of changes in tax policy, restore full employment.
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