The various economic “stimulus” proposals have, by all accounts, failed to pull the U.S. economy out of recession. Regardless of whether they’ve had a positive effect on jobs or the economy at large, at least one sector of America has been irrevocably damaged by the stimuli: the “reality based community.”
For those with better things to do than read the rantings of the left blogosphere, the “reality based community” is the arrogant sobriquet that liberals bestowed upon themselves during the Bush 43 era to denote their superiority to an administration whose rhetoric and policies they deemed insufficiently attuned to reality.
Since Barack Obama has become president, however, the left seems to have abandoned this rhetorical mode, especially as it concerns the effectiveness of so-called stimulus spending. As blogger DrewM at the Ace of Spades blog puts it, “The most amazing thing about member of the self-proclaimed ‘reality based community’ is just how divorced from reality they are.”
His case in point is lefty Washington Post blogger Greg Sargent who argues that more stimulus spending is the only thing that can help the economy improve despite the fact that the American public no longer favors such spending. Such thinking can’t possibly be the result of their own rational observation about much higher amounts of unemployment but rather because evil Republicans are tricking them:
The result is that it’s even less likely that Dems will risk taking “another bite at this apple,” as Josh puts it. The public doesn’t focus on the details, and the failure to pass an ambitious enough stimulus has ensured that the Dem solution fell short of expectations, which paradoxically has left the public increasingly pessimistic about government spending as the best means to fuel the recovery. That in turn led Dems to conclude that further ambitious government action is politically unfeasible.
Lefties like Sargent and President Obama’s economic team are saying such things based on their belief in a so-called “multiplier effect” of government spending, a principle they’re borrowing from famous liberal economist John Maynard Keynes which states that government spending can actually have an effect of greater economic value than its actual cost to taxpayers.
Unfortunately, however, the multiplier effect is largely a myth and every bit as false as the belief that all tax cuts lead to increased government revenues. Harvard economist Robert Barro explains how:
I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports — personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses — there was a dampener, rather than a multiplier.
We can consider similarly three other U.S. wartime experiences — World War I, the Korean War, and the Vietnam War — although the magnitudes of the added defense expenditures were much smaller in comparison to GDP. Combining the evidence with that of World War II (which gets a lot of the weight because the added government spending is so large in that case) yields an overall estimate of the multiplier of 0.8 — the same value as before. (These estimates were published last year in my book, “Macroeconomics, a Modern Approach.”)
There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases. For one thing, people would expect the added wartime outlays to be partly temporary (so that consumer demand would not fall a lot). Second, the use of the military draft in wartime has a direct, coercive effect on total employment. Finally, the U.S. economy was already growing rapidly after 1933 (aside from the 1938 recession), and it is probably unfair to ascribe all of the rapid GDP growth from 1941 to 1945 to the added military outlays. In any event, when I attempted to estimate directly the multiplier associated with peacetime government purchases, I got a number insignificantly different from zero.
Even if you assume that Barro is wrong and that a multiplier of 1.5 to 1 exists for government spending, the administration seems to have completely misunderstood the idea behind spending as conceived by Keynes. True Keynesian economics calls for government stimulus to be temporary, a far cry from the bloated and unpaid-for programs that have been enacted by President Obama and his economic team.
Some in the administration do seem to be aware of this problem but instead of enacting plans designed to bring down government outlays in the long term through reform of Social Security or Medicare, they’re proposing tax increases in a recession, something Keynes was also against. Economist Allan Meltzer explains:
The type of stimulus he advocated was very specific. He said it should be geared towards increasing private investment. He viewed private investment, as opposed to big government spending, as the source of durable job creation. He also said that the deficits should be self-liquidating, so that the increased economic activity caused by the stimulus inevitably generated a combination of extra tax revenues and lower unemployment payments. With higher revenues and lower outlays, the deficit would disappear. […]
It’s unbelievable that a man [Keynes] whose main theme was to smooth investment comes to be the proponent of redistributing income away from the people and companies who do the investing.
My advice on the stimulus plan was, don’t do it. Let’s look at the plan. First, a lot of the money was used to reduce the deficits of state and local governments by increasing the federal debt. It was simply money transferred from the federal government. The economic multiplier effect was zero. Second, the temporary tax cuts went to paying off credit cards and other debts, not spending that would have increased economic growth.
Stimulus proponents are not only mangling the facts with regard to the effects of their policies, they also can’t seem to grasp the arguments of the man whose theories they cite as justification for their policies.
Rest in peace “reality based community.” We hardly knew ye.
