Following the bursting of the housing bubble
both the Bush and Obama administrations attempted to jump-start the economy with stimulus spending.
Stimulus spending is often accompanied by the phrase “the government must create jobs.”
The theory is that every dollar the government spends is income for someone who, when he
spends that income, provides income for another person. This is the Keynesian multiplier effect. Critics argue that the multiplier effect overlooks
the fact that the money the government spends doesn’t fall from the sky. Every dollar the
government spends it must obtain, either through taxing, or borrowing, or printing money. And
where the government does these things, jobs are destroyed. In the end, the government
doesn’t create jobs at all, but, rather, moves jobs as it spends in one place and taxes somewhere
else. People who claim that government spending creates jobs are only seeing half of the picture.
Can this be true? Let’s look at the history of stimulus spending
in the United States over the past half century. We’ll measure growth in federal spending
along the horizontal axis and economic growth on the vertical axis. The blue dot is our
economy at a point in time. The further to the right we go, the more stimulus spending
we’re experiencing. The further to the left we go, the less growth in federal spending
is occurring. Along the vertical axis we measure economic growth. The further up the graph
we go, the more economic growth we’re experiencing. The further down the graph we go, the less
economic growth we’re experiencing. We’ll place one dot for each quarter since the 1950s.
If stimulus spending worked, we would expect to see a pattern of dots that moved up and
to the right. When the government spends more money, we should see more economic growth.
When the government spends less money, the economy should slow down. Now let’s look at
the actual data for the U.S. economy. From 1955 to the present, government spending
has risen in some quarters, fallen in others, and remained unchanged in others still. But
what is clear is that there is no apparent positive relationship between government spending
and economic growth. For example, in 1968 federal spending rose an average of more than
11 percent per quarter. One year later, economic growth averaged less than 1 percent per quarter.
But in 1993, federal spending contracted an average of more than 2 percent a quarter.
Yet one year later the economy grew at the same 1 percent per quarter. Of course there
might have been something else going on in 1967 and 1993 other than federal spending
that influenced economic growth, and that is why we look at all the quarters from 1955
to the present. Unless there was something atypical going on in every single quarter,
we must conclude that there is no evidence here that increased federal spending results
in economic growth. What does this mean? It means that the only thing stimulus spending
does is to make the budget deficit worse. But it isn’t necessary to look at all this
data; we need only look back over the past three years. Between the Federal- Reserve
and the federal government we have injected the equivalent of two Canadian economies into
the U.S. economy, and yet our unemployment remains stubbornly fixed at 9 percent. One
thing that has changed is that our government is now $4.6 trillion further in debt than
it was before the stimulus efforts.