Saturday, March 17, 2012

The Malaise of 2012 | Part II

* Inordinate Stimulus, Undue Debt and Global Warming Foolishness Caused the Recession

* By: Larry Walker, Jr. *

“… an unprecedented degree of federal government spending and intervention vis-à-vis the $787 billion dollar economic stimulus package, the $81 billion dollar bailouts of GM and Chrysler, and the enactment of health care and financial regulatory and reform bills have done nothing to stimulate our anemic recovery and have fundamentally failed at creating private sector jobs, or generating economic growth necessary for a sustainable, healthy recovery.” ~ Douglas Schoen via: The Daily Beast

Inordinate Stimulus

According to Economist Raymond Richman of Ideal Taxes Association, “The recession of 1937-38 indicated that there was no Keynesian multiplier.” That is to say, as soon as the stimulus of the preceding four years was reduced, the economy tanked. Nevertheless, Keynesians believe that the Roosevelt administration reduced stimulus spending too soon. The same argument has been made by Nobel Prize winner Prof. Paul Krugman and former Chairman of the Council of Economic Advisers, Prof. Christina Romer, and many others, after the failure of the $787 billion Recovery Act of 2009.

If four years of government stimulus isn’t enough, how long should it take, until the nation declares bankruptcy? The truth is it really doesn’t matter how long a stimulus program lasts, whether it endures for a day, a week, a month or a century; as soon as the program ends, so does all of the propped up economic growth. Is there any proof to the contrary? No, not unless hot air can be likened to proof. Let’s us ponder the stimulus theory.

For example, if the government were to give each citizen a $40 per month advance out of their future Social Security retirement entitlement, such stimulus may provide a small boost to personal consumption, or private savings. Why a family of four might even be able to purchase an extra half-tank of gasoline, at today’s prices. But will the ability to buy an extra half-tank of gas lead to a permanent $40 per month pay raise?

Not unless the extra mileage is used to obtain either a second, or higher paying job. Short of that, once the stimulus ends, so will the temporary boost to disposable monthly income. The point is that unless a stimulus program results in a permanent increase to future income, when the program ends, the recipient is demoted back to square one, or in the current economy, square zero.

With inflation soaring as it is today, an extra $40 per month will, if one is lucky, afford the same amount of gasoline that could have been purchased three years ago, at half the cost. And what’s the trade off? Well, one can either look forward to a smaller retirement annuity in the future or a tax hike in the near-term in order to make up the difference.

Green wasn’t as green as we thought!

To further drive home the point, if the government were to identify certain promising green energy companies, and to grant them billions of dollars in loan guarantees; would this represent the kind of stimulus capable of permanent growth? Well, that would depend on whether such companies produced marketable products. We know the U.S. Department of Energy has already engaged in precisely such activity. And what were the results?

As soon as the funds were disbursed, the companies purchased buildings, equipment, hired workers, and began to manufacture. But in most cases, the products in question have turned out to be overpriced and unmarketable. Since there was no unsubsidized present day demand for imaginary 22nd Century products, once the stimulus well ran dry, most of these grand endeavors collapsed. The remainder will soon follow suit.

Dr. Valerie Ramey, Professor of Economics at the University of California, San Diego recently published a Working Paper Series in the National Bureau of Economic Research (NBER) entitled, “Government Spending and Private Activity,” in which she drew the following conclusions:

  • Private spending falls significantly in response to an increase in government spending.

  • Increases in government spending lower unemployment, but in most cases virtually all of the effect is through an increase in government employment, not private employment.

  • And that on balance, government spending does not appear to stimulate private activity.

Although in early 2010 the economy received a jolt, the bump in the road we all felt was nothing but a speed bump on the way to another recession. The sheer size of the injection propelled us upward for a fleeting moment, but in the aftermath, GDP declined from a year-over-year growth rate of 3.0% in 2010, to a year-over-year growth rate of just 1.7% in 2011. Alas, once the stimulus subsided, economic growth was cut nearly in half. Inordinate stimulus is a major contributor to the Malaise of 2012.

No matter how you slice it, deficit-financed government stimulus doesn’t provide the requisite spark essential to permanent economic growth, it never has, and it never will. There is no Keynesian multiplier. So what else is new?

To be continued …

Continued from Part I

Related:

Tax Simplification, Part II – Saving $1,756 Billion, Overnight

Why Our Recession Call Stands – Economic Cycle Research Institute (3/15/12)

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