Debunking Myths About Stimulus Spending

With certain folks issuing loud calls for yet another stimulus, it’s worth it to take a good long hard look at the last one, and Veronique de Rugy does just that:

Myth 1:Stimulus spending can jump start the economy and fix unemployment.

Fact 1:Recent experience suggests stimulus spending won’t help.


As you can see, the administration’s promise that the American Recovery and Reinvestment Act (ARRA) would keep unemployment rates from reaching 8.8 percent and would create some 3 million jobs—90 percent of them in the private sector—did not materialize.

The unemployment rate started at 7.6 percent when President Obama took office and peaked at 10.2 percent in October 2009. Since the enactment of the stimulus bill in February 2009, the unemployment rate has not approached pre-ARRA levels, even though $382 billion has been made available by government departments and agencies (on top of tax credits and other tax-related items). In fact, unemployment recently edged up, from 9 percent in April to 9.1 percent in May.


Myth 2:Additional infrastructure spending is an effective way to stimulate the economy and create jobs.

Fact 2:In theory, infrastructure spending injects more money into the economy than other types of government spending. In reality, however, politicians rarely include infrastructure spending in stimulus bills. Instead, they spend money on items like transfers and tax cuts. Only 3 percent of the last stimulus went to infrastructure.


But experience tells us that the next stimulus won’t be any better. As the chart above shows, only 3 percent of the last stimulus went to infrastructure spending. Why? Because such programs are not political winners. For one thing, they take too long to produce results. Therefore they always take a back seat to politically-popular tax credits and transfers to the states.


Myth 3:Tax rebates will stimulate the economy.

Fact 3:The evidence says they don’t. First, people usually save the extra money. Second, even if tax rebates did increase consumption, companies don’t hire employees or build new plants because of a one-time boost.

The theory that tax rebates and payroll tax cuts will result in an increase in consumption suffers from several serious problems. First, it assumes people don’t realize that the extra cash flow is temporary and that businesses don’t realize that the new consumption won’t last. Tax rebates, for example, assume that if people get extra money to increase their consumption, businesses will then expand production and hire more workers. But this is not true. Even if producers notice an upward blip in sales after the rebate checks go out, they will know it’s temporary. Companies won’t hire more employees or build new factories in response to a temporary increase in sales. Those who are foolish enough to do so will go out of business.

These are just excerpts, the charts and more data are available at the link above.


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About Conservative Wanderer

Conservative Wanderer is currently Editor-in-Chief of That's Freedom You Hear! That means anything that goes wrong can be blamed on him. Previously he was a contributor to the PJ Tatler.
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