Why the Stimulus Failed

by alexvanbuskirk

Why the Stimulus Failed

By Arthur C. Brooks @ National Review (September 25, 2012)

A majority disapproves of the president’s 2009 stimulus, and according to a 2010 CNN poll, about three-quarters of Americans believe the money was mostly wasted.

Of course, the measure of economic success is not public opinion, but the factual effects of policy. The emerging evidence on various spending programs shows that Americans’ intuition is correct: The Keynesian deficit spending has been poorly designed and badly executed, and it has had little benefit for our economy.

The reason is straightforward. As many economists have found, most government spending has relatively little effect on the economy, and any effects are generally short-lived. For example, Harvard economist Alberto Alesina and his colleagues show in a new National Bureau for Economic Research study across many countries that government spending has little connection to GDP growth, making spending cuts ideal for balancing budgets without provoking a recession — but this also means that spending does little to stimulate economies. Alesina finds, however, that tax changes have large macroeconomic effects; that is, tax increases reliably depress the economy.

Again, this is not political dogma, but empirical reality. A new study published in the International Review of Economics shows that there is a direct and clear link between economic freedom and prosperity. Studying economic-freedom measures ranging from tax rates to regulation to government spending, the study authors find that from 2004 to 2008, economically freer OECD countries consistently outperformed those that were less economically free.

Is the prescription for the next administration, then, no government spending, and a move toward a minimum-tax, super-capitalist state that will gut all public services? The administration would have Americans believe that is the philosophy of today’s Ryanista Republicans. As President Obama put it in his Osawatomie, Kan., speech last December, “Their philosophy is simple: We are better off when everybody is left to fend for themselves and play by their own rules.”

This is nonsense. Conservatives today understand the importance of a reliable safety net for the truly indigent and the necessity of dealing with certain market failures. Further, there is universal support on the political right for opportunity-equalizing government policies, such as publicly funded education (ideally, administered for the benefit of children as opposed to rent-seeking bureaucrats and teachers’ unions).

But conservatives also know that when it comes to economic progress, the best government philosophy is one that starts every day with the question, “What can we do today to get out of Americans’ way?” In other words, the president should not ask what new agency or program the government can create to stimulate, bail out, or redistribute from this group to that one. That will ultimately add to our problems, rob more from our children, and make it harder to create the jobs, opportunity, and growth our country needs. The president should instead ask these questions: What tax barrier to small business can we lower; what competition-killing regulation can we rescind; what unfair crony-tax loophole can we close?

These are not new insights. Thomas Jefferson summarized them best when he famously said:

‘A wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.’

Most Americans understand these truths, and the next administration must hew to them if it wants to succeed in breaking our government out of its cycle of incompetence, failure, and excuses. This is not political propaganda or an untested theory. It is practical reality based on economic truth.