OPINION
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August 5, 2012, 6:11 p.m. ET
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Arthur Laffer: The Real 'Stimulus' Record
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In country after country, increased government spending acted more like a depressant than a stimulant.
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By ARTHUR B. LAFFER
It worked miserably, as indicated by the table nearby, which shows increases in government spending from 2007 to 2009 and subsequent changes in GDP growth rates. Of the 34 Organization for Economic Cooperation and Development nations, those with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.
The four nations—Estonia, Ireland, the Slovak Republic and Finland—with the biggest stimulus programs had the steepest declines in growth. The United States was no different, with greater spending (up 7.3%) followed by far lower growth rates (down 8.4%).
Still, the debate rages between those who espouse stimulus spending as a remedy for our weak economy and those who argue it is the cause of our current malaise. The numbers at stake aren't small. Federal government spending as a share of GDP rose to a high of 27.3% in 2009 from 21.4% in late 2007. This increase is virtually all stimulus spending, including add-ons to the agricultural and housing bills in 2007, the $600 per capita tax rebate in 2008, the TARP and Fannie Mae and Freddie Mac bailouts, "cash for clunkers," additional mortgage relief subsidies and, of course, President Obama's $860 billion stimulus plan that promised to deliver unemployment rates below 6% by now. Stimulus spending over the past five years totaled more than $4 trillion.
If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).
Often as not, the qualification for receiving stimulus funds is the absence
of work or income—such as banks and companies that fail, solar energy companies
that can't make it on their own, unemployment benefits and the like. Quite
simply, government taxing people more who work and then giving more money to
people who don't work is a surefire recipe for less work, less output and more
unemployment.
Yet the notion that additional spending is a "stimulus" and less spending is
"austerity" is the norm just about everywhere.
Without ever thinking where the
money comes from, politicians and many economists believe additional government
spending adds to aggregate demand. You'd think that single-entry accounting were
the God's truth and that, for the government at least, every check written has
no offsetting debit.
Well, the truth is that government spending does come with debits. For every
additional government dollar spent there is an additional private dollar taken.
All the stimulus to the spending recipients is matched on a dollar-for-dollar
basis every minute of every day by a depressant placed on the people who pay for
these transfers. Or as a student of the dismal science might say, the total
income effects of additional government spending always sum to zero.
Meanwhile, what economists call the substitution or price effects of stimulus
spending are negative for all parties. In other words, the transfer recipient
has found a way to get paid without working, which makes not working more
attractive, and the transfer payer gets paid less for working, again lowering
incentives to work.
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But all of this is just old-timey price theory, the stuff that used to be
taught in graduate economics departments. Today, even stimulus spending
advocates have their Ph.D. defenders. But there's no arguing with the data in
the nearby table, and the fact that greater stimulus spending was followed by
lower growth rates.
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Stimulus advocates have a lot of explaining to do. Their
massive spending programs have hurt the economy and left us with huge bills to
pay. Not a very nice combination.
Sorry, Keynesians. There was no discernible two or three dollar multiplier
effect from every dollar the government spent and borrowed. In reality, every
dollar of public-sector spending on stimulus simply wiped out a dollar of
private investment and output, resulting in an overall decline in GDP. This is
an even more astonishing result because government spending is counted in
official GDP numbers. In other words, the spending was more like a valium for
lethargic economies than a stimulant.
In many countries, an economic downturn, no matter how it's caused or the
degree of change in the rate of growth, will trigger increases in public
spending and therefore the appearance of a negative relationship between
stimulus spending and economic growth. That is why the table focuses on changes
in the rate of GDP growth, which helps isolate the effects of additional
spending.
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The evidence here is extremely damaging to the case made by Mr. Obama and
others that there is economic value to spending more money on infrastructure,
education, unemployment insurance, food stamps, windmills and bailouts. Mr.
Obama keeps saying that if only Congress would pass his second stimulus plan,
unemployment would finally start to fall. That's an expensive leap of faith with
no evidence to confirm it.
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Mr. Laffer, chairman of Laffer Associates and the Laffer Center for
Supply-Side Economics, is co-author, with Stephen Moore, of "Return to
Prosperity: How America Can Regain Its Economic Superpower Status" (Threshold,
2010).
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