Stimulative Government Spending

In a published report on February 6, the US unemployment rate increased to 7.6%. That was enough to spur lawmakers to work into the weekend on a spending package--one that I hope will create some jobs, relieve some personal pain and help us through the current recession.

You might recall that I wrote about Christina Romer's study from the Council of Economic Advisors. Her group projects the creation of 3-4 million jobs by the end of 2010.


The $787 billion spending package is a whopping amount to spend. It was met with resistance by Republicans (and seven Democrats) in the House.

• They questioned whether the package would actually stimulate jobs.
• They believed more time was needed to debate this 1,071 page bill, instead of rushing headlong into a colossal spending program with no time for Congressmen to read it on Friday the 13th.
• They found considerable pork barrel spending that had nothing to do with job creation.
• They found that 26% of the proposed spending would take place after 2010--probably long after the recession has ended. (This is much better than the 40% allocation in the bill just a few days ago.)
  

Even the Congressional Budget Office (CBO), the official scorekeepers for legislation, said the bill will help in the short term but result in so much government debt that within a few years they would crowd out private investment, actually leading to a lower GDP over the next 10 years than if the government had done nothing.

Also, many Americans railed against several unnecessary items in the package--forcing President Obama into damage-control mode--and encouraging everyone to come together for the good of the country.


In the process he used some scare tactics to illustrate this point. If we drag our feet and fail to act, this crisis will turn into a catastrophe, Obama said. The bill before Congress isn't perfect, but it is absolutely necessary.



While we hope this will work to stimulate the economy...get us out of the recession...and help create jobs, it is also instructive to review what we've learned from the past.

For example, there is absolutely no long-term economic evidence that higher government spending creates jobs. In fact, it is exactly the opposite. More government spending is correlated with higher levels of unemployment. The Office of Management & Budget (OMB) and the Bureau of Labor Statistics (BLS) gives us insight.

• Every dollar the government spends must be borrowed or taxed from the private sector.
  
• As government takes resources from the private sector, fewer job are created.
• Most government spending is less efficient than private sector spending.
  

So why is government trying spending stimulus when evidence shows this does not work? I can think of two reasons.

1. Keynesian economics. There is an economic theory forwarded by British economist, John Manyard Keynes, which says goverment should stimulate economic growth and improve stability in the private secctor—through taxation and funding public projects.

   This was tried in during the Great Depression. In retrospect, such government spending did not work. The US finally emerged from that dreadful period with the advent of WWII.

   Likewise, Japan attempted numerous spending packages, yet its economy languished for years in the 1990s.

2. Political ideology. This was succinctly stated by Rahm Emanuel, now Chief of Staff for President Obama, during a November, 2008 Wall Street Journal CEO Council meeting.
   
   He said: You never want a serious crisis to go to waste. What I mean by that is that it is an opportunity to do things that you think you could not do before...This is an opportunity what used to be long term problems be they in the health care area, energy area, education area, fiscal area, tax area, regulatory reform area, things we had postponed for too long that were long-term are now immediate and must be dealt with.
   

My bottom line is that I hope this package helps us. I do have concerns with the consequences of paying for it, starting in a couple years with inflation likely to be a problem...and a likely increase in federal taxes which could hamper future growth.

On the other hand, there will likely be some worthwhile infrastructure projects that are completed, as Rahm Emanuel says because you never want a serious crisis to go to waste.

Personally, I believe the efforts of TARP I, various monetary measures taken by Fed Chairman Ben Bernanke and subsequent monetary measures, such as TARP II get to the root causes of this recession, and will be the most likely tools to extract the US from this recession.

It's plausible that this recession will be in its final phase before a majority of the government spending kicks in.