Obamanomics and The Stimulus Plan - Part 2

One last look at the stimulus program before moving on to other government fallacies and failures. As you know from the news and previous posts, various parties are debating how many, if any, real jobs were "created" by the Obama stimulus plan. Today's post is based on an article in the November, 2009 issue of Reason Magazine by Vernique de Rugy. It is tales more of an analytical approach than the common sense approach from yesterday's post.

Ms. de Rugy does a real nice review of the stimulus plans objectives and results:

• Obama said his stimulus plan would create millions of jobs by the end of 2010 when he asked for the funds in early 2009.
• His economic advisers, Christina Romer and Jared Bernstein, said that employment could reach as high as 9% by the end of 2010.
• Since then the economy has shed over two million jobs and the unemployment rate is already over 9%.
• By May, the White House had fine tuned its claim by saying jobs would be created AND saved to the tune of 3.5 million. Never mind that no one had ever come up with a solid method to calculate "jobs saved."

Thus, rather than admit these economists missed their forecast of job creation, they decided to invent a new category that is basically not measurable, jobs saved, to close the forecast miss. Could it be that these economists' basic theories are flawed and that increased government stimulus spending is not efficient or effective in reversing a recession?

Ms. de Rugy seems to agree. She reviews two studies by non-Obama economists. Robert Barro of Harvard University researched evidence from 100 countries that showed high government spending hurts economies in the long run by crimping private investments and shifting resources to uses specified by politicians from uses preferred by citizens. Barro showed that for every dollar of government spending you get less than a dollar in real economic growth. This is similar to our common sense discussion yesterday, i.e. governments do not create wealth, they merely take it from taxpayers who would have spent it for their needs and gave the wealth to the political class who spend it as they see fit.

Ms. de Rugy also cites a study by economist Valerie Ramey of the University of California - San Diego to see how military spending affects GDP. She also found minimal positive impact from government spending and actually "found evidence that consumer and business spending actually decline after an increase in government purchases."

As discussed in a distant past blog, if you laid all of the world's economists end-to-end they would still not reach a conclusion. Thus, who is to say what set of economists are right, Obama's or Barro and Ramey. However, it is obvious that Obama's team has serious missed their forecast and maybe their miss is explained by the closing paragraphs of the article. Ms. de Rugy correctly points out that government spending sources consist of only three sources: debt, new money, or taxes. In other words, the government has to take money or value out of the economy before putting it back in via a stimulus program:

• higher taxes directly transfer wealth from citizens to the government/political class and thus, citizens spend less on things and services they desire. If enough taxes are taken by the government, consumer spending drops to levels that result in layoffs from companies who see revenue drop. Consumers may also enter into the underground economy, the barter economy or take other extra actions to get out from under the tax burden.
• extra government debt has to be financed somehow and if the government gets the financing, there is less resources available for more efficient private investment.
• if the government just inflates the money supply then the value of existing resources lose value and buying power, resulting in less spending power of business and consumers.

Thus, according to the above positions on government funding, Obama and the political class are doing the exact opposite of what is needed. Given the results of nearly 10% unemployment, it looks like they are pouring gasoline on the recession fire, burning us all in the process. Remember, GOVERNMENT DOES NOT CREATE WEALTH OR JOBS, they merely redistribute wealth and money via taxation, debt, and inflation.