Wednesday, August 8, 2012

'Stimulus' spending

I continue to be amazed at the extent to which economists are driven by ideology. How else can you explain the diametrically-opposed views of conservative and Keynesian economists on the effects of government borrowing and spending? One side or the other are kidding themselves; and it's not easy for us non-economists to join - or even understand - the debate.

Clearly, values are involved here, but the question of whether specific policies work is an objective one.

Writing in The Wall Street Journal, Arthur B. Laffer makes a case (based on figures from the IMF) that stimulus spending has actually been counterproductive, "more like a valium for lethargic economies than a stimulant."

Of the 34 OECD countries, those that 'stimulated' the most from 2007 to 2009 saw the least growth in subsequent GDP rates.

"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."

It might be objected that an economic downturn will trigger increases in public spending, and so the appearance of a negative relationship between stimulus spending and economic growth. But Laffer focuses on changes in the rate of GDP growth to help isolate the effects of more spending.

"The evidence is extremely damaging to the case made by Obama and others that there is economic value to spending more money on infrastructure, education, unemployment insurance, food stamps, windmills and bailouts. 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."