Tuesday, July 17, 2012

Boom, Bust, Or Stuck Here In The Middle

A wise friend whose 4.0 in undergraduate economics beats my 3.71 (as I recall) in poli sci tells me I'm wrong to believe that paltry U.S. growth rates over the last two years compared to Britain's negative growth mean that we were better off with Keynesian fiscal policies instead of the Brits' massive cuts in public spending. He cautioned me against buying the canard that FDR's big spending ended the Great Depression. World War II did.

I replied that in fiscal terms, the war was a massive government spending program that gave us a booming economy (plus more debt by 1945 in proportional terms than we have today). I await his devastating riposte. In the meantime, Bruce Bartlett suggests that my friend is right, at least to an extent. Bad Keynesianism definitely doesn't work. Bartlett writes that the Obama stimulus barely stimulated:
[I]t appears that only 11 percent of total stimulus outlays definitely added to growth; the rest may have had no effect at all.

I think that much of the criticism of the stimulus legislation on both sides of the political spectrum has been misplaced. Liberals tend to decry the small overall size of the original package, while conservatives say it was too big. But perhaps the very limited allocation for investment and consumption was the problem.

Potentially, we could have had a smaller program that was far more concentrated on consumption and investment spending that would have given us more “bang for the buck,” done more to raise growth at a lower budgetary cost, and maybe made both sides happy.

Barack Obama's greatest error was focusing on health care instead of jobs during 2009-10 and letting Congress instead of the smartest economists he could find (including perhaps my friend) decide how to spend 2009's $800 billion stimulus. Those who want to vindicate Keynesian policies ought to make sure that they make the most of every public expenditure. They should yearn to prove wrong critics who say that government is genetically incapable of making smart decisions about what sectors of a private economy will benefit most from injections of taxpayer cash and create the most jobs most quickly.

Instead, as Bartlett's analysis shows, Obama has enabled his critics to say that the feds are ineffective, even incompetent. It didn't have to be that way. As Detroit roars back and Japanese automakers stall, Presidents Bush and Obama share credit for the amazingly successful bailouts of GM and Chrysler. But the stimulus was a bust, because Congress was in charge of deciding what programs would get funded. Maybe if Obama had served in the Senate longer, he would have known better than to let that happen.

As for Mitt Romney, he opposed the auto bailouts, and he's pledged to dust off Rep. Paul Ryan's hyper-austere, safety net-destroying budget for 2013-14 -- which would give us a chance to try it England's way after all. Dare I say dumb and dumber?

Hat tip to The Dish

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