Friday, July 29, 2011

What the new GDP numbers tell us about stimulus

What the new GDP numbers tell us about stimulus

For all the stimulus haters out there:

Then, Congress passed the stimulus bill, the fall in growth dwindled to 0.7 percent in the second quarter, and, by the third quarter of 2009, we had 1.7 percent growth. “We went from negative to positive at precisely the time that the stimulus was providing maximum benefit in terms of tax cuts and spending increases,” Zandi says. “The numbers actually reinforce the importance of the stimulus in jump-starting a recovery.” What the stimulus didn’t do, however, was raise employment to the levels that the White House had predicted — partly because the economy was in worse shape than anyone, even the official data-crunchers, knew.

Of course, the stimulus only lasted two years, winding down in the end of 2010. And what happened then? As Dean Baker, an economist at the Center on Economic and Policy Research observes, “The downward revision to the first quarter data coupled with the revision of the fourth quarter growth to 2.3 percent from 3.1 percent, suggests that the winding down of the stimulus has seriously dampened growth.” Zandi agrees: “If fiscal policy had simply stayed neutral, the numbers suggest we would have had around 2 percent growth these past two quarters, which isn’t great, but it’s a lot better than what we actually had.” Except fiscal policy wasn’t neutral—it was shrinking. The stimulus wound down, that extra government spending started disappearing, and, with it, economic growth dwindled.



1 comment:

Colin said...

Of course, us stimulus haters said that government spending would produce a sugar rush effect that would then wear off and actually leave the economy in worse shape. This is exactly what has transpired. Spending went up, GDP went up with it, and then crashed back down after the money ran out. Meanwhile, resources have been left more inefficiently deployed than would otherwise be the case because they are being allocated by government instead of markets, hence the anemic growth. Every dollar spent on ridiculous green energy projects is one less dollar available to the private sector for allocation.

Mark Zandi, a huge proponent of the Keynesian spending approach and stimulus backer, is simply trying to spin what is an obvious failure.

“If fiscal policy had simply stayed neutral, the numbers suggest we would have had around 2 percent growth these past two quarters, which isn’t great, but it’s a lot better than what we actually had.”

Well yes, if we could raise spending to a permanent new high plateau GDP would increase. But in the world we inhabit money is finite and has to be borrowed or taxed (which is counter-cyclical and serves as an economic drag), so such an approach isn't feasible. Reality has once again intruded upon the Keynesian fantasy.