Thursday, September 8, 2011 - Why the Stimulus Failed

Even though Pres. Obama won’t mention “stimulus” tonight, remember that all government spending has an opportunity cost, i.e. the money spend by government won’t be invested by the private sector (which is much better at picking more productive investments). - Opinion: Why the Stimulus Failed


The Keynesian theory was that a burst of new government spending would take up some of the slack in aggregate consumer demand. This was justified… based not on real-world observation but on abstract macroeconomic models that depend on the assumptions of the authors. The Congressional Budget Office's quarterly studies—often cited to claim the stimulus created tens of thousands of new jobs—are based on such a model. By informative contrast, Messrs. Jones and Rothschild interviewed actual people who received stimulus dollars and asked how they spent the money.

"As is often the case when economic models are transferred from the blackboard to actual public policy, there was a gap between theory and practice."

A dollar that eventually will be taken out of the private economy through borrowing or higher taxes to fund pointlessly expensive projects is not the way to nurture a recovery.

The lesson of such on-the-ground knowledge is that the stimulus was a lost opportunity. In practice it became a shotgun marriage between an economic theory justified by computer models and 40 years of liberal social priorities (clean energy, Medicaid expansions and the rest).

The economy would have benefitted far more if the government had instead improved the incentives for people and businesses to invest, produce and grow.




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