Economist Chris Edwards had a thought-provoking article recently about why government spending doesn’t “stimulate” the economy over the short-run or the long-run. Rather than growing the economy, stimulus packages are wasteful wealth transfers, much like a “leaky bucket,” that harm the economy in the long run, whether or not there are any short-run stimulus effects.
As Edwards observes, “despite ongoing federal deficits of more than $1 trillion a year, many liberals are calling for more government spending to ‘create jobs.’” But if government spending creates jobs, it’s hard to understand why unemployment has soared, even as government spending has exploded in recent years: “Federal spending has soared over the past decade. As a share of gross domestic product, spending grew from 18 percent in 2001 to 24 percent in 2011.” As he notes, “government spending and taxing creates ‘deadweight losses,’ which result from distortions to working, investment and other activities. The CBO says that deadweight loss estimates ‘range from 20 cents to 60 cents over and above the revenue raised.’ Harvard University’s Martin Feldstein thinks that deadweight losses ‘may exceed one dollar per dollar of revenue raised.’” Due partly to this “leaky-bucket” effect, Texas A&M economist Edgar Browning concluded that “It costs taxpayers $3 to provide a benefit worth $1 to recipients,” and that “today’s welfare state reduces GDP — or average U.S. incomes — by about 25 percent.”
Stimulus spending will undermine our country’s international competitiveness. I wrote earlier about how the stimulus package used taxpayer money to outsource American jobs to foreign countries like China (in the name of promoting “green jobs”) and wiped out jobs in America’s export sector by reducing purchases of American goods in Mexico and Canada.
Edwards notes that recent federal stimulus spending will undermine America’s international competitiveness in terms of tax burdens. As he notes, the recent massive spending increases, if not curtailed, will have to be paid for with equally massive tax increases, wiping out America’s edge over other countries in tax rates. “This year, government spending in the United States hit 41 percent of GDP, meaning that more than 4 out of every 10 dollars that we produce is consumed by our federal, state and local governments. We used to have a substantial government size advantage compared to other countries. But . . . while government spending in the United States was about 10 percentage points of GDP smaller than the average . . . in the past, that gap has now shrunk to just 4 points. A number of high-income nations — such as Australia — now have smaller governments than does the United States. This is very troubling because America’s strong growth and high living standards were historically built on our relatively small government. The ongoing surge in federal spending is undoing this competitive advantage that we have enjoyed in the world economy.”
This spending surge is projected to worsen in the future. “CBO projections show that federal spending will rise by about 10 percentage points of GDP between now and 2035. If that happens, governments in the United States will be grabbing more than half of everything produced in the nation by that year.”
Despite all this “deficit-spending stimulus, U.S. unemployment remains stuck at more than 9 percent and the recovery is very sluggish compared to prior recoveries.” The Obama administration had claimed that “‘multipliers’ from government spending are large, meaning that spending would give a big boost to GDP. But other economists have found that . . . multipliers are actually quite small, meaning that added government spending mainly just displaces private-sector activities. Stanford University economist John Taylor took a detailed look at GDP data over recent years, and he found little evidence of any benefits from the 2009 stimulus bill” even in the short run, while Harvard’s Robert Barro concluded that it will have a harmful effect on the economy due to “future damage caused by higher taxes and debt.”
A recent study by two economists, Tim Conley and Bill Dupor, found that the 2009 stimulus package has wiped out 550,000 jobs. After reviewing its harmful provisions, Harvard University economist Jeffrey Miron concluded that the stimulus package was designed to reward special-interest “constituencies,” not to boost the economy. The stimulus contained all sorts of welfare. The stimulus was so poorly run that stimulus money wound up going to prisoners and dead people, bridges to nowhere, and useless government buildings.
In demanding passage of the $800 billion stimulus package, Obama cited Congressional Budget Office (CBO) claims that it would save jobs in the short run, while ignoring the CBO’s own finding that the stimulus will actually shrink the economy over the long run, by exploding the national debt and crowding out private investment. Nothing in any of the CBO’s findings supported Obama’s outlandish claim that the stimulus package was needed to avert “irreversible decline.”