Thursday, March 15, 2012

How Stimulus Fails

I read a good article this morning called How Stimulus Fails. It's by Jim Epstein of Reason Magazine, a libertarian publication.

The idea behind stimulus is that the government will revive a flagging economy by spending more money on such things as infrastructure, green energy, weatherization, and other things. That way, more people will be put to work while simultaneously making the world a better place, as roads are built or improved and America becomes more energy-independent due to green technology. And the people employed in these projects will then have money to spend, and that will play a role in rejuvenating the economy.

But, according to Jim Epstein, things have not turned out that way. He quotes Veronique de Rugy of George Mason University's Mercatus Center, who states: "Even if you were to believe that government spending can trigger economic growth, the money is never spent in a way that’s consistent with the conditions laid out by the Keynesians for it to be efficient."

So what's the problem, according to Epstein? One problem is that states have cut funding on infrastructure projects in order to balance the budget. In Maryland, that resulted in a decrease of 8,000 jobs, and the stimulus money was used to pay the salary of 600 workers.

Second, when stimulus money goes to big companies, those companies often do not use that money to employ people who are unemployed. Rather, they employ people who are already employed, and the stimulus fails to decrease unemployment. If I'm not mistaken, this was something that my Dad told me about why he didn't think the stimulus would work.

So what would work? I doubt that giving millionaires tax cuts in the vain hope that the millionaires' money will somehow trickle down is the way to go. I can sympathize with the pro-stimulus argument that, in an economy where people are reluctant to spend, the government may have to increase demand by spending the money itself. But is there a way to do stimulus in a manner that works? One left-wing argument that I have heard is that President Obama should have more public works projects, similar to what existed under Franklin Roosevelt's New Deal, under which people worked in government programs. I don't know to what extent FDR's New Deal involved the private sector in its projects, but would stimulus work if people worked directly for the government, as opposed to the government funneling the money through big companies?

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