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Oct 31, 2010

Why the Stimulus Package Failed

Obama:  All economists agree that we needed the stimulus and that it has saved our economy.
Cato:  At least 200 economists disagree.
Obama:  I don't care about fringe economists.
Cato:  They include Nobel Prize winners.
Obama:  I don't care about fringe Nobel Prize winners.

Why the Stimulus Package Failed
10/31/10 - Open Market by Hans Bader

A roundup of articles by prominent economists who report that the $800 billion stimulus was doomed from the start. The stimulus was misapplied, even if you believe the economic justifications for doing it. The links and edited comments below are from Bader's article. See the article for even more information.

The Case Against The Fiscal Stimulus
2010 - Harvard economist Jeffrey Miron (pdf)

Dr. Miron shows the stimulus failed, even if you take for granted Keynesian liberal assumptions about economic policy. Congress spent wastefully while failing to revive the economy. Miron concludes that the stimulus was designed to reward politically connected constituencies and special-interest groups like public-employee unions.

Stimulus Spending Doesn't Work
10/01/09 - WSJ Opinion by Harvard economists Robert J. Barro And Charles J. Redlick

Our research shows no evidence of a Keynesian 'multiplier' effect. There is evidence that tax cuts boost growth.

Stimulus is probably the worst bill since the 1930s'
02/09/09 - Examiner.com by William Dupray

The Kennedy, Reagan, and Bush-43 tax cuts spurred the economy back into shape. By contrast, the FDR spendfest in the 1930's did nothing, like similar attempts in Japan and Argentina to spend their way out of recessions.

Obama's tax increases could kill economic recovery
05/14/09 - Examiner.com by Hans Bader

Harvard economist Martin Feldstein has advised Obama. He says, "the barrage of tax increases proposed in President Obama’s budget could kill any chance of an early and sustained recovery.” He compares Obama’s tax increases to the ones that contributed to the Great Depression and the “Lost Decade” of economic stagnation in Japan.

Congress Blew The Stimulus.  Beware A Double-Dip In 2010.
01/03/10 - Business Insider by Joe Weisenthal

Harvard economist Martin Feldstein  [edited]: 

I supported the $800 billion fiscal (spending) stimulus, to the dismay of my conservative friends. But, the design of the stimulus was was poorly done by Congress. It delivered much less than its price tag suggested.

So far, the stimulus has helped push the economy out of recession, but other negative forces raise questions about its durability. There is a significant risk the economy could run out of steam sometime in 2010.

Please, No More Government Spending!
The Daily Beast by Vernon L. Smith

Prof. Smith is the George L. Argyros Professor in Finance and Economics at Chapman University, and received a Nobel prize in Economics in 2002.

[edited]:  You were told that the stimulus was justified because it would start a recovery that would increase output (jobs) by more than its increased cost. But, you are skeptical that there has been any recovery, and think that you have been misled by the president and the economic experts.

Our best shot at increasing employment and output is to reduce business taxes, and reduce the impediments and cost of creating new start-up companies. Don’t subsidize them; just reduce their taxes, even as they become larger.

200 Economists Oppose the Stimulus Plan
01/27/09 - Open Market by Cord Blomquist

Mr. Obama says: "There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy."

The Cato Institute collected 200 economists who oppose the stimulus package, including 1986 Nobel Prize economist James Buchanan. He won for explaining how government economic policy is affected by politicians’ self-interest and non-economic forces. Those 200 signed this statement  [edited]: 

With all due respect Mr. President, that is not true.

You claim that all economists are now Keynesians and that we all support a big increase in the burden of government. But, we the undersigned do not believe that more government spending is a way to improve economic performance.

More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s.

It is a triumph of hope over experience to believe that more government spending will help the U.S. today. Policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to improve the economy.

Oct 28, 2010

Stimulus Produces Stagnation

Treasury Official:  The Fed Bank will print lots of money for us to spend.
Assistant:  We will construct more federal buildings, and the people will feel rich. Then what?
Treasury Official:  We will collect all of that money back in higher taxes.
Assistant:  Will that dampen their enthusiasm?

A Deficit-Financed Stimulus Leads Only to Stagnation
09/29/10 - Investors.com by Jerry L. Jordan
- Via Cafe Hayek

Mr. Jordan is a past president of the Federal Reserve Bank of Cleveland and a member of President Reagan's Council of Economic Advisers.

Soviet Realism

Leonid Brezhnev was General Secretary of the Communist Party and leader of the Soviet Union from 1964 until his death in 1982. He spoke at the Soviet Union Communist Party Congress in 1972:

The fundamental problem we face is that we can only distribute and consume what is actually produced.

Imagine the grandeur of the event. Communist Party leaders from throughout the Soviet Union were seated before Brezhnev in a large convention hall. This was similar to a US national political convention, but somber and powerful. The Party controlled all aspects of Soviet life. They listened in deep respect to every word of their totalitarian ruler.

Brezhnev made the above statement. It was the equivalent of saying with heavy meaning, "Gentlemen, the fundamental problem we face is that
2 + 2 = 4".

Imagine the country-wide failure which required an all-powerful leader to emphasize such a simple fact. The simple fact that you can eat a hamburger which is on the plate in front of you, but that you cannot eat a picture of a hamburger, and you cannot benefit from the promise of a hamburger unless you can exchange that promise for a real hamburger on the grill.

I think Brezhnev faced the problem that we face now in the US. The wierd economic ideas followed by the Soviet government were not working and had produced a crisis. Brezhnev had to reset policy. The Soviet Union had to face simple reality, rather than follow abstract theory. And, that is what we must do in the US.

The article which I link above provides an economic description of simple reality, nicely written. I think you will understand a reasonable economic explanation when you see one. You should be skeptical of any economic statements that are superficial or disconnected. Be especially wary of appeals to elite authority such as, "My program has the support of all the economists who I respect and who I have talked to."

Remember that entire nations can be misled, to such an extent that the rulers need a reminder of the simplest facts.

Summary of the Article

This is a summary of Mr. Jordan's three page article, with some added explanation. The article is worth reading in full.

Permanent Income

Households must decide what goods they can enjoy today and how much they must save or invest for the future. They estimate their long-term "permanent" income, and decide to consume (spend) some part of it. They don't spend all of a temporary windfall (eg. a bonus), and they don't cut back by the full amount of a temporary loss (eg. losing work for a short time).

Estimates of permanent income are relatively steady, but long-term changes in the overall economy will raise or lower those estimates over time.


Long periods of steady employment, increasing salary, and steady investment gains (eg. increasing values in 401K plans and house prices) may convince people that they are permanently more wealthy, and can afford to spend more now and in the future.

People will borrow against a plush future, to immediately enjoy such things as a bigger home or a vacation. This produces a low or negative savings rate. This is rational, and not a problem to be changed by government economic policy.

Businesses see opportunities and want to use current resources to meet the needs of a prosperous future. Real interest rates rise as individuals borrow for current enjoyment and businesses borrow to build more production capacity.

Higher interest rates direct borrowing away from low-yield projects, keeping those resources available for more profitable (more desireable) projects. Higher rates allocate resources to the best uses in the competitive markets of a healthy economy. This is also not a problem to be changed by government policy.


Decreasing employment, lower investment income, and falling housing prices produce an estimate of lower permanent income. Unfunded government pensions, large budget deficits, and growing government debt all promise higher taxes and lower after-tax personal income.

Government budgets are always balanced in real terms. The true burden of taxation is whatever the government spends. Citizens will pay for that spending, either now or later, either through explicit taxes or the effects of inflation (see below).

Future paychecks will be smaller or they will buy less. After higher taxes and/or inflation, people expect to be less well off.

A lower estimate of permanent income prompts people to consume less, to pay down current debts, and not acquire new debt. They doubt that they will have enough future income to both pay off their debts and spend as much as before. People want to avoid ruining their credit rating in the future. Paying down debt and keeping more cash in savings accounts increases the national savings rate.

The prospect of higher taxes and increased regulation lower the expected real, after-tax returns from new business projects. Fewer projects can return the needed minimum, real profit. Lower numbers of projects require fewer workers, affecting the least skilled workers the most. The lowered demand for both personal and business borrowing lowers real interest rates.

AMG: Low interest rates are not usually a sign of opportunity. Government interference to lower rates does not spark a recovery. People and business reduce borrowing because of their rational view of the future, not because already low rates are not low enough.

Government efforts to stimulate the economy by deficit spending are utterly useless. Government spending maintains some employment. But, businessmen know that tax increases (or inflation) will be used to pay back higher government debt and interest. They estimate their future customers will have lower real income to spend. So, they cut back on new projects, investment, and employment. This rational response of business and individuals cancels out any positive effects of that government spending.


Taxes, Deficits, and Inflation

There are three choices.

  • Tax Now. Limit government spending to the taxes being collected now, or raise taxes to cover increased spending. The US government for 40 years has almost always spent more than it has collected in taxes in any year.
  • Deficit Spending. Borrow the money needed to support spending above the amount of current tax collections (the additional deficit). The government sells US Treasury bonds to raise the money needed. Those bonds are promises to pay back that money after say 1, 5, 10, or more years, depending on the bond. The government pays interest to the bondholders as the cost of borrowing the money.

    The government sells bonds every month to support new spending and to pay off older bonds that have come due. Taxes must be increased to pay interest on the bonds, and to eventually pay off the debt.

    Every bond sold by the government is a loan to the government by someone with cash looking to make an investment. The government gets to use (or misuse) those resources, instead of a business receiving those funds for startup or expansion. This is called "crowding out" private investments. Ironically, huge government borrowing creates the risky business outlook which encourages investment in the supposedly riskless government bonds.

  • Inflation. The Federal Reserve Banks (the US central banks) create money by buying US Treasury bonds. This is a last resort by government to acquire more money to spend. This is typically done when the government does not want to pay increasing interest rates on the bonds it might sell to the public, or to avoid increases in those interest rates.

    This is a hidden tax. The government acquires real resources by being the first spender of that new money. Later spenders find that prices for everything rise slowly as the new money is traded for an unchanged supply of real goods. The last people to spend are those who have money in bank savings accounts. They find that their money buys less real goods when they eventually use that money to buy things, such as buying their food in retirement.

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Why Spending Stimulus Plans Fail
11/2008 - Easy Opinions

The money isn't free. It is taken from the people who plan and invest in productive organizations. This destroys jobs and lowers everyone's income. The money is then given to government agencies which increase budgets. This is a form of government consumption. Investment is turned into consumption, and job expansion is killed.

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A Tested Stimulus Plan
02/2009 - Easy Opinions

The economic crisis is the result of a giant six year stimulus provided by housing loans. As we now know, it worked for a while and ended in disaster. What will the current stimulus plans produce when the money runs out? We know the answer: an economy like the current one, but somewhat worse.

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Stimulus Does Not Cure a Recession
11/2008 - Easy Opinions

Jobs change when people change what they want to buy or can afford. It is possible to keep people at their low-value or unneeded jobs for a bit longer, only by wasting the savings that should be financing a real recovery.

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Daniel J. Mitchell  reports on a few cases where governments realize that stimulus doesn't work.


Oct 14, 2010

Selling Us What We Won't Make

Fred:  We must prevent Americans from buying cheap Chinese clothes and women's purses, and so encourage ...
Mike:  ... our bright young people to sew cheap American clothes and women's purses.

The Choice
10/14/10 - Cafe Hayek by Don Boudreaux

Mr. Boudreaux posts about the value of free trade.

[edited]  By buying products such as textiles, footwear, and luggage from China and other foreign countries, workers and resources in America are freed to work in fields such as bioengineering and artificial intelligence.

If we prevent the importation of “cheap Chinese goods,” we would require American industries to produce – what? – cheap American goods. How bleak.

The problem for the United States is not that the Chinese and others are supplying inexpensive goods to us. The problem is that we are preventing business development in the US that would employ our people to produce many things that we would like. We don't need to limit trade, we need to free ourselves from suffocating restrictions on being productive.

This comment by Dallas Weaver nicely presents this issue [edited].

Without China and others to actually manufacture our US designed high tech devices, none of our engineers, designers, and scientists would be needed. For example, i-Pad sales so far have utilized something on the order of 100,000 man-years of manufacturing employment. If this were done in the US, it would have been more automated, but still it would probably have required at least 10,000 man-years of manufacturing labor.

However, imagine trying to get permits from our bureaucrats to build or even refurbish a manufacturing complex for 10,000 jobs in this country on the required time-scale. The environmental impact report on traffic impacts alone would take several years, and a single law suit on one component of the supply chain would delay the entire project for years.

You cannot manufacture products in rapidly changing markets quickly enough in the US. The markets change far more quickly than our government permit system and legal parasites allow. These malevolent forces slow projects far beyond the point of responding to changed market demands.

This is the real world of the US. Every bureaucrat and nut group has the ability to delay any project. A good example is the attempt to get a permit for seawater desalinization in southern California using existing seawater intakes and using a site already covered with abandoned oil tanks. Many millions of dollars have been spent on the project over the past 8 years, but even the permitting process is not complete.

Another example in southern California. We have a coastline, and a market for fresh seafood of more than 20 million people. Studies show we could create a $2+ billion aquaculture business directly employing 10,000 workers, competing to replace the $8 billion of seafood we currently import, without significant environmental impacts.

As a consultant in this area, I have had to inform potential investors that permits are effectively impossible and that they should look outside the US for business opportunities.

Imports have allowed our society to delay facing the fact that we have evolved from a country which could do and build anything, to a country dominated and controlled by bureaucrats and lawyers. They are parasitizing and decreasing the productive sectors of our economy. Without imports, our system would have collapsed.

Our innovation has continued to move our country forward, because our innovative ideas have been actualized outside our country.

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Stop Bashing Business, Mr. President
10/15/10 - Wall Street Journal by Ken Langone.  (Via Chicago Boys)

Ken Langone is a former director of the New York Stock Exchange and a co-founder of Home Depot. He describes how the onerous regulation of business and a hostile attitude from government keeps businesses from forming.

[edited]  Mr. President, I am glad that you answered my question at the town-hall meeting you hosted on September 20th in Washington, D.C.

The event seemed more like a lecture than a dialogue. For more than two years, the country has listened to your sharp rhetoric about how American businesses are short-changing workers, fleecing customers, cheating borrowers, and generally "driving the economy into a ditch."

I asked why it was necessary for you to vilify the people who deliver econimic growth, at this time when investment and dynamism are so critical to our country? Instead of offering a straight answer, you informed me that I was part of a "reckless" group that had made "bad decisions" and now required your guidance, if only I'd stop "resisting" it.

I'm sure that kind of argument draws cheers from the partisan faithful. But to my ears it sounded patronizing. One of the chief conceits of centralized economic planning is that the planners know better than everybody else.

You insist that your policies are necessary and beneficial to business, but this is utterly at odds with what you and your administration are saying elsewhere.

  • You picked a fight with the U.S. Chamber of Commerce, accusing it of using foreign money to influence congressional elections, something the chamber adamantly denies.
  • Preet Bahrara is your U.S. attorney in New York. He compared investment firms to Mexican drug cartels, and said he wants the power to wiretap Wall Street when he sees fit.
  • You drew guffaws of approving laughter with your car-wreck metaphor. You recently told a crowd that your critics are "standing up on the road, sipping a Slurpee" while you are "shoving" and "sweating" to fix the broken-down jalopy of state.

You offer condescending encouragement one day and hostile disparagement the next. That short-sighted wavering creates uncertainty and economic paralysis, because no one can tell what to expect next. Any investor could tell you this.

If we tried to start Home Depot today, under the kind of onerous regulatory controls that you have advocated, it's a stone cold certainty that our business would never get off the ground, much less thrive. Rules against providing stock options would prevent us as a start-up from incentivizing worthy employees. We could not pay the incredibly high cost of regulatory compliance overall and mandatory health insurance. Still worse are the risks of loss imposed by ever-rapacious trial lawyers.

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Bourgeois Dignity
10/05/10 - Cato@Liberty by Jason Kuznicki

Chief Secretary of Economics:  Those miserable shopkeepers and small businessmen are not cooperating. We will have to lower their taxes, just a bit and for a short while, to get them to work harder and invest more. We will get all of that revenue back later when we introduce the new rules.

Apparatchik:  Do you think they might work less because they are despised?

Economist Deirdre McCloskey:  [edited]  The Big Economic Story of our time is that the Chinese in 1978 and the Indians in 1991 came to attribute a dignity and a liberty to the bourgeoisie [small businessman] formerly denied. Then, China and India exploded in economic growth.

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Drowning In Law
10/16/10 - Overlawyered by Walter Olson

Mr. Olson quotes an op-ed by Philip K. Howard in the New York Daily News. There is much more at the link.

[edited]  Employers face legal challenges at every step. This requires legal and other overhead costing 50% more per employee for small businesses than big businesses.
  • Municipalities requires multiple and often nonsensical forms to do business.
  • Labor laws expose them to legal threats by any disgruntled employee.
  • Mandates to provide costly employment benefits impose high hurdles to hiring new employees.
  • Well-meaning but impossibly complex laws impose requirements to prevent consumer fraud, provide disability access, prevent hiring illegal immigrants, display warnings and notices, and prevent scores of other potential evils
  • The tax code is incomprehensible.

America will thrive only so long as Americans wake each morning believing they can succeed by their own efforts. Innovation, not cheap labor, is the economic engine of America. The Kauffman Foundation reports that the net increase in jobs since 1980 is attributed solely to newly started businesses.

The fatal flaw of the modern state is that it doesn't honor the human element of all accomplishment. Rules don't make things happen. Only people do, making fresh choices in response to the infinite complexities of daily challenges.

Nobel economist Friedrich Hayek warned us in 1960. "We are not far from the point where the deliberately organized forces of society may destroy those spontaneous forces which have made advance possible."

We may finally be there. Government is basically bankrupt, and the accretion of law is suffocating individual initiative. Nothing will work until we clean it out.