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Biden’s Misguided Keynesian “Stimulus
We have decades of real-world experience with Keynesian economics. The results are not pretty.
- It didn’t work for Hoover.
- It didn’t work for Roosevelt.
- It didn’t work for Japan.
- It didn’t work for Europe.
- It didn’t work for Obama.
It’s also worth pointing out that Keynesians have been consistently wrong with predicting economic damage during periods of spending restraint.
- They were wrong about growth after World War II (and would have been wrong, if they were around at the time, about growth when Harding slashed spending in the early 1920s).
- They were wrong about Thatcher in the 1980s.
- They were wrong about Reagan in the 1980s.
- They were wrong about Canada in the 1990s.
- They were wrong after the sequester in 2013.
- They were wrong about unemployment benefits in 2020.
This story needs to be told, again and again, especially since we’re now going to have another real-world test case thanks to President Biden’s so-called American Rescue Plan.
I just wrote a column on Biden’s proposal for the Foundation for Economic Education, and it is co-authored by Robert O’Quinn, who most recently served as the Chief Economist at the Department of Labor.
We started by pointing out that Biden is basically copying Trump’s big-spending approach, but with a different justification (Keynesianism instead of coronavirus).
Mr. Biden is bringing a new twist to the profligacy. Instead of trying to justify the new spending by saying it is needed to compensate households and businesses for government-mandated lockdowns, he is making the Keynesian argument that the new spending is a way of stimulating the economy.The same approach was used when he was Vice President, of course, but did not yield positive results. …Mr. Biden and his team apparently think the anemic results were a consequence of not spending enough money. Hence, the huge $1.9 trillion price tag for his plan. Will his approach work? …We can learn about economic recovery today by reviewing what happened during the Great Recession earlier this century and what happened at the end of World War II.
We explain the causes of the previous recession and point out that Obama’s so-called stimulus didn’t work.
…the Great Recession…was the result of an unsustainable housing bubble caused by overly accommodative monetary policy from the Federal Reserve and misguided housing policies. …it took years to clean up the mess from the bursting of the housing bubble. Households slowly rebuilt their savings and cleaned up their balance sheets. …Banks had to work out problem loans and rebuild their capital… Obama’s stimulus did not drive that healing process and spending more money would have done little to accelerate it.
And we also point out that the economy recovered very quickly after World War II, even though the Keynesians predicted disaster in the absence of a giant new package such as Truman’s 21-Point Program (his version of FDR’s horrible visionof an entitlement society).
Keynesians feared that demobilization would throw the US economy into a deep depression as federal spending was reduced. Paul Samuelson even wrote in 1943 that a failure to come up with alternative forms of government spending would lead to “the greatest period of unemployment and industrial dislocation which any economy has ever faced.” …President Harry Truman proposed “a 21-Point Program for the Reconversion Period” shortly after the war ended. But his plan, which was basically a reprise of Franklin Roosevelt’s New Deal, was largely ignored by Congress. Did the economy collapse, as the Keynesians feared? Hardly. …Spared a repeat of FDR’s interventionism, the economy enjoyed strong growth. One of the big tailwinds for growth is that the forced savings accumulated during the war years allowed consumers to go on a peacetime buying binge.
That last sentence in the above excerpt is key because 2021 is a lot like 1945. Back then, households had lots of money in the bank (wartime rationing and controls meant there wasn’t much to buy), which helped trigger the post-war boom.
Something similar is about to happen, as we explain in the column.
The current economic conditions are somewhat reminiscent of the ones that existed after World War II. The limited ability to spend money during the pandemic has helped boost the personal saving rate… In aggregate terms, personal saving soared from $1.2 trillion in 2019 to $2.9 trillion in 2020. …pent-up demand funded with more than $1 trillion in excess savings will resuscitate…GDP.
So what does all this mean? Well, the good news is that 2021 is going to be a very good year for the economy. That’s already baked into the cake.
The bad news is that Biden is taking advantage of the current political situation to increase the burden of government spending.
…the economy prospered after World War II despite (or perhaps because of) the failure of Mr. Truman’s 21-point proposal. President Biden’s team is either unaware of this history, or they simply do not care. Perhaps they simply want to take advantage of the current environment to reward key constituencies. Or they may be trying to resuscitate the tattered reputation of Keynesian economics by spending a bunch of money so they can take credit for an economic recovery that is already destined to happen.
Since I gave the good news and bad news, I’ll close with the worse news.
There’s every reason to expect very strong growth in 2021, but Biden’s spending binge means that future growth won’t be as robust
- Especially since the economy also is saddled with lots of wasteful spending by Bush, Obama, and Trump.
- And especially if Biden is able to push through his agendaof higher taxes on work, saving, and investment.
The bottom line is that the United States is becoming more like Europe and the economic data tells us that means less prosperity and lower living standards.
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Milton Friedman – Stimulus and Inflation
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Daniel J. Mitchell on Obama’s Economic Stimulus Plan
Dan Mitchell discusses Ineffectiveness of Stimulus Spending
January 21, 2021
Office of Barack and Michelle Obama
P.O. Box 91000
Washington, DC 20066
Dear President Obama,
I wrote you over 700 letters while you were President and I mailed them to the White House and also published them on my blog http://www.thedailyhatch.org .I received several letters back from your staff and I wanted to thank you for those letters.
I have been reading your autobiography A PROMISED LAND and I have been enjoying it.
Let me make a few comments on it, and here is the first quote of yours I want to comment on:
Page 244
We proposed that nearly $800 billion be divided into three buckets of roughly equal size. In bucket one, emergency payments like supplementary unemployment insurance and direct aid to states to slow further mass layoffs of teachers, police officers, and other public workers. In bucket two, tax cuts targeted at the middle class, as well as various business tax breaks that gave companies a big incentive to invest in new plants or equipment now instead of later. Both the emergency payments and the tax cuts had the advantage of being easy to administer; we could quickly get money out the door and into the pockets of consumers and businesses. Tax cuts also had the added benefit of potentially attracting Republican support.
The third bucket, on the other hand, contained initiatives that were harder to design and would take longer to implement but might have a bigger long-term impact: not just traditional infrastructure spending like road construction and sewer repair but also high-speed rail, solar and wind power installation, broadband lines for underserved rural areas, and incentives for states to reform their education systems—all intended not only to put people to work but to make America more competitive.
Considering how many unmet needs there were in communities all across the country, I was surprised by how much work it took for our team to find worthy projects of sufficient scale for the Recovery Act to fund. Some promising ideas we rejected because they would take too long to stand up or required a huge new bureaucracy to manage. Others missed the cut because they wouldn’t boost demand sufficiently. Mindful of accusations that I planned to use the economic crisis as an excuse for an orgy of wasteful liberal boondoggles (and because I in fact wanted to prevent Congress from engaging in wasteful boondoggles, liberal or otherwise), we put in place a series of good-government safeguards: a competitive application process for state and local governments seeking funding; strict audit and reporting requirements; and, in a move we knew would draw howls from Capitol Hill, a firm policy of no “earmarks”—to use the innocuous name for a time-honored practice in which members of Congress insert various pet projects (many dubious) into must-pass legislation.
PAGE 257
I stepped up to speak. It was my first time at a House Republicans gathering, and it was hard not to be struck by the room’s uniformity: row after row of mostly middle-aged white men, with a dozen or so women and maybe two or three Hispanics and Asians. Most sat stone-faced as I briefly made the case for stimulus—citing the latest data on the economy’s meltdown, the need for quick action, the fact that our package contained tax cuts Republicans had long promoted, and our commitment to long-term deficit reduction once the crisis had passed. The audience did perk up when I opened the floor for a series of questions (or, more accurately, talking points pretending to be questions), all of which I cheerfully responded to as if my answers mattered.
Ted Dehaven rightly notes below:
Or was it because the recession created a “window of opportunity” for politicians to quickly spend a bunch of additional money on pet causes, which had the effect of benefitting certain areas of the country?
Obama’s Stimulus: A Bit of Pork, a Lot of Opportunism
By Tad DeHavenTwitterLinkedInRedditFacebook
A study [$] published in the winter edition of Political Science Quarterly considers two possible reasons for why the 2009 American Recovery and Reinvestment Act (ARRA) failed to sprinkle Uncle Sam’s magic dust onto those areas of the country that were being hardest hit by the recession.
Was it because well‐positioned politicians were successful in delivering the pork?
Or was it because the recession created a “window of opportunity” for politicians to quickly spend a bunch of additional money on pet causes, which had the effect of benefitting certain areas of the country?
I’m going to skip right to the answer: the uneven geographic distribution of stimulus funds had only a little to do with traditional pork barreling and much to do with Obama’s then chief of staff Rahm Emmanuel’s famous quip that “You never want a serious crisis to go to waste.”
On the possibility of traditional pork‐barreling, the authors found no statistically significant relationship between the distribution of funds and whether a county was represented by a politician serving on a congressional committee relevant to stimulus funding. Nor was a relationship found between funding and counties that were represented by a Democrat in the House or Senate. However, a relationship was found between funding and those counties that overwhelmingly voted for the president:
There does, however, appear to be a distinct tilt toward counties that were stronger for the Democratic Party in 2008. All else equal, counties at the 90th percentile of Democratic share presidential vote ’08 received between $35 and $36 more per capita in both total funding and infrastructure projects than did counties at the 10th percentile (p ≤ .001)…The effect of presidential politics may be especially relevant for the distribution of ARRA funds because most of the grants, loans, and contracts funded by the stimulus were in discretionary programs overseen by administrative agencies, over which presidents and their political appointees exercise influence.
On the other hand, the authors found that a county possessing attributes that synched with the policies funded in ARRA were more likely to receive money. For example, a county with a lot of interstate highway mileage made out better than a county that did not. Another example is counties that had a larger share of state and local government workers received a larger share of funds.
While it’s not surprising that legislation that funds highway infrastructure projects would benefit areas with more highway mileage, let’s remember that the stimulus was sold by many politicians as being necessary to help those with the greatest need. Indeed, as the authors point out, the text of the legislation stated that a main goal was “to assist those most impacted by the recession.”
The bottom line is that the Obama administration used the economic downturn to spend a bunch of money it otherwise would not have been able to on a stack of its pet policies. In the process, the counties that did the most to put Obama in the White House received a taxpayer‐funded thank you in return. TopicsTax and Budget Policy
Sincerely,
Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733 everettehatcher@gmail.com
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The Daily Hatch 