Has the gargantuan stimulus stimulated anything?

Benjamin Zycher Contributor
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Let us review the recent record on federal spending stimulus and its relationship to GDP growth, about which data are freely available from the Bureau of Economic Analysis.  In February 2008, $165 billion—for the most part, dollar transfers to the states and increased federal outlays—was spent as economic “stimulus.”  In 2009, the infamous $862 billion Obama stimulus package was enacted, comprising spending increases of $574 billion and various tax reductions of $288 billion.  Over the last few months, with the looming elections and monstrous polling numbers concentrating the minds of White House and Congressional leaders, proposals for $100-200 billion in additional “stimulus” spending have been prominent.

And so the increase in the national debt has been gargantuan; but has there been any resulting “stimulus,” that is, enhanced economic growth?  The following charts show the respective contributions of private investment, personal consumption, net exports, and government spending to GDP growth for the last three years.

Investment changes explain most of the recession and recent recovery.  Changes in personal consumption have an effect that is important but smaller, while changes in net exports seem to explain only some of the smaller GDP changes in 2008.  What is of greater interest is the contribution of government outlays: They have had virtually no effect at all (with a simple “correlation” with GDP growth of only about 5 percent).

Can this possibly surprise anyone?  For all the White House happy talk about multipliers and other such manifestations of poor economic analysis, resources used by government must come from somewhere, and unless that somewhere is a mattress, the effect of “stimulus” is to shift economic activity rather than to increase it.  But the shift, of course, is toward activities approved politically; the real goal of “stimulus” is to stimulate government and its constituencies rather than the economy writ large.

This weak GDP effect of federal spending is consistent with the modern peer-reviewed literature; not only are the White House economists familiar with it, some of them have contributed to it.  At best, therefore, President Obama and his political advisers have engaged in self-deception; at worst, they have displayed rank cynicism in vastly expanding federal spending and debt merely to subsidize the public employee unions and other allies.  Which is it?  It is becoming clear that in substantial part the November election will be a referendum on that question, and that the answer will not be one from which the White House will be able to claim vindication.

Benjamin Zycher is a senior fellow at the Pacific Research Institute. He may be reached at benzycher@zychereconomics.com.