Can We Flush the Keynesian Economics Yet?

So people are starting to look at the economy and wonder if the Stimulus (American Recovery & Reinvestment Act) actually helped. Keep in mind that President Obama and VP Biden and others still, to varying degrees, champion the successes of the program. But what did it really do?

Jeffrey Anderson at the Weekly Standard writes:

The report [the 7th Quarterly report on the Stimulus] was written by the White House’s Council of Economic Advisors, a group of three economists who were all handpicked by Obama, and it chronicles the alleged success of the “stimulus” in adding or saving jobs. The council reports that, using “mainstream estimates of economic multipliers for the effects of fiscal stimulus” (which it describes as a “natural way to estimate the effects of” the legislation), the “stimulus” has added or saved just under 2.4 million jobs — whether private or public — at a cost (to date) of $666 billion. That’s a cost to taxpayers of $278,000 per job.

That’s a pretty hefty price tag and given the 9.1% unemployment (at least the advertised number – the real unemployment rate is more like 16%), is that really a success? Noted economist John Taylor at Stanford (a candidate to be the next chairman of the Federal Reserve) looked at the data and outcomes and wrote:

Individuals and families largely saved the transfers and tax rebates. The federal government increased purchases, but by only an immaterial amount. State and local governments used the stimulus grants to reduce their net borrowing (largely by acquiring more financial assets) rather than to increase expenditures, and they shifted expenditures away from purchases toward transfers. Some argue that the economy would have been worse off without these stimulus packages, but the results do not support that view.

People are going to ride the GOP for not “compromising” on a tax hike (in any of the varying forms that the Democrats might like to package it…including the euphemism “revenue enhancement”) but we need to face reality. We have a spending problem. The Stimulus spent $666 Billion that we’re not getting back and it didn’t help the economy. Anderson goes on in the Weekly Standard with the following:

Furthermore, the council reports that, as of two quarters ago, the “stimulus” had added or saved just under 2.7 million jobs — or 288,000 more than it has now. In other words, over the past six months, the economy would have added or saved more jobs without the “stimulus” than it has with it. In comparison to how things would otherwise have been, the “stimulus” has been working in reverse over the past six months, causing the economy to shed jobs.

The actual employment numbers from the administration’s own Bureau of Labor Statistics show that the unemployment rate was 7.3 percent when the “stimulus” was being debated. It has since risen to 9.1 percent. Meanwhile, the national debt at the end of 2008, when Obama was poised to take office, was $9.986 trillion (see Table S-9). It’s now $14.467 trillion — and counting.

So we need to stop the spending. Yes, programs will get cut and hopefully the government will do that smartly. But the elephant in the room is demographics. If we do raise taxes on the higher earners, how long will that last? If they are part of the retiring Boomer generation, their incomes will likely start to fall as they move into retirement mode – preserving as much capital and living off the interest and then the capital while growing the capital by little, if any. Others may take the course of action that New York, Maryland, etc. based high earners are doing and fleeing the high tax areas. So facing the likelihood of a reduced population feeding the new taxes aimed at “revenue enhancement” what comes next? We’ll be back where we are now looking at more cuts…and likely from the left side of the aisle, more tax hikes. Maybe to a lower income bracket.

James Pethokoukis writes for Reuters:

Indeed, the results are horrifying. The two-year-old recovery’s terrible tale of the tape: A 9.1 percent unemployment rate that’s probably closer to 16 percent counting the discouraged and underemployed, the worst income growth and weakest GDP growth of any upturn since World War II, a still-weakening housing market. Oh, and a trillion bucks down the tube. Oh, and two-and-a-half years … and counting … wasted during which time the skills of unemployed workers continue to erode and the careers of younger Americans suffer long-term income damage. Losing the future.

Focus for a minute on the last part. Estimates are in that if we take action now to cut spending, we’re likely looking at a 5% cut to primary federal spending. As we delay and shift that to out years, it grows. Quickly. A 14 or 20% cut will be much harder to stomach. So keep this in mind when you’re listening to the media and liberals bemoan the GOP’s position against new tax hikes.

* Hat tip that started this whole thread for me – Ed Driscoll.  Great stuff, Ed.

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