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The US stimulus jobs chart meets reality

The US stimulus jobs chart meets reality
Sam Bowman
ASI Blog
Adam Smith Institute
June 22, 2011

"Another update to the chart used by the Obama administration to promote its stimulus package. (Real figures charted as red dots.) Professor Steve Horwitz says that it's time to call it a failure. It's hard to disagree. Even on its own terms, the stimulus has not delivered the jobs promised. In fact, the situation is worse than the projection of unemployment without the recovery plan.

Those of us who see a recession as a painful but necessary process of economic reorganization will be unsurprised. If there's been a period of investment in things people no longer want, you need a period where that investment and energy shifts to things people do want. Of course, it's impossible to show that the stimulus has made things worse than they would have been otherwise, but it's clear that it hasn't worked as it was supposed to."

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Library Topic: The Austrian School: Its History and Relevance in Modern Economics
Library Topic: 2007-2009 Recession: Boom, Bust, and Beyond
Library Topic: John Maynard Keynes and Keynesian Economics

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"As January 20 nears, Barack Obama's ambitions for spending on the likes of roads, bridges and jobless benefits keep growing. The latest leak puts the 'stimulus' at $1 trillion over a couple of years, and the political class is embracing it as a miracle cure.

Not to spoil the party, but this is not a new idea. Keynesian 'pump-...

This short piece and corresponding graph illustrate the effectiveness of Keynesian economic theory during the recent economic downturn. Chris Edwards offers a simple math formula to further drive home the message: "Biggest Keynesian Stimulus + Slowest Recovery = Time to Rethink Keynesian Theory."

"The eclipse of Keynesian economics proceeds. When Keynes wrote 'The General Theory of Employment, Interest and Money' in the mid-1930s, governments in most wealthy nations were relatively small and their debts modest. Deficit spending and pump priming were plausible responses to economic slumps. Now, huge governments are often saddled with massive debts. Standard Keynesian remedies for...

"A professor of economics at Harvard University from 1983-1991, Lawrence Summers served as chief economist of the World Bank and secretary of the Treasury before returning to Harvard University as its president in 2001.

In this interview, Summers discusses the battle of ideas, globalization and its backlash, the Asian financial...

"Both Marx and Hobson believed that the principal cause of depression was the insufficient ability of capitalists to find sufficient investment opportunities to offset increased savings generated by economic growth. Keynes uniquely contributed to this view by showing how the relation of savings to income could lead to a stable economy but with a depressed level of...

"As extended unemployment swells almost everywhere across the advanced industrial world, that question is turning into a lightning rod for governments.

For years, Denmark was held out as a model to countries with high unemployment and as a progressive touchstone to liberals in the United States. The Danes, despite their lavish...

"According to Keynesian economists, government hiring stimulates the private sector during a recession because government employees go out and spend much of their paychecks in the private sector, and extra demand is exactly what the private sector needs during a recession. But this year’s experience with census hiring contradicts that view."

"The British economist John Maynard Keynes may live on in popular legend as the world’s most influential economist. But in much of Europe, and most acutely here in the land of his birth, his view that deficit spending by governments is crucial to avoiding a long recession has lately been willfully ignored."

In this week’s chart, Mercatus Center Research Fellow Matthew Mitchell uses data from the Bureau of Economic Analysis to illustrate the increase in the size of federal, state, and local expenditures as a share of GDP over the course of the past century.

"We are all Keynesians now. Even the right in the United States has joined the Keynesian camp with unbridled enthusiasm and on a scale that at one time would have been truly unimaginable.

For those of us who always claimed some connection to the Keynesian tradition, this is a moment of triumph, after having been left in the...

"Some readers ask whether Keynes believed that the government should always run deficits — and whether I believe that too. The answer is no on both counts."

"The problem today is Keynesian-style policy, the darling of the establishment politicos and media giants: big government solutions, deficit spending, easy money, bailouts.  Keynes has suddenly trumped Adam Smith.  And that's dangerous."

"The New Deal dam project that professor Malamud is so proud of provided a few thousand jobs 80 years ago, but has spurred migration, farming, and development that is likely unsustainable and may ultimately be the biggest malinvestment in history."

"Within the context of income-expenditure analysis, it is appropriate to think of Friedman's Monetarism as being directly opposed to Keynesianism. Although both Keynesianism and Monetarists accept the same high level of aggregation, one which closes off issues believed by the Austrians to be among the most important, they have sharp disagreements about the nature...

"So influential was John Maynard Keynes in the middle third of the twentieth century that an entire school of modern thought bears his name. Many of his ideas were revolutionary; almost all were controversial. Keynesian Economics serves as a sort of yardstick that can define virtually all economists who came after him."

"The late revered British economist John Maynard Keynes, whose 1936 treatise, The General Theory of Employment, Interest, and Money, changed the way many economists think about recessions, once wrote that 'in the long run we’re all dead.' Well...

"For a while, there has been a strain of center-left American commentary that has viewed China's leaders as some kind of technocratic super-geniuses who have done a much better job of guiding their society than the loons and hacks who would actually, you know, be voted for. Call this the Tom Friedman school of thought.

In reality, China's leaders have a tendency to fall for a lot of the...

This piece explains President Obama's Keynesian nature and describes some of the confusion this causes with his ancestry connections. Yadron attempts to clarify that Obama's economic ideas (i.e. Keynesian) are vastly different from his relation to the...

"[Martin Wolf] thinks the Republicans' 'de facto Keynesianism' puts the Democrats at a historic disadvantage, as it's almost impossible to run against a party that constantly promises everyone a free lunch and blames the other guys when the check arrives. He thinks the situation could become disastrous if a Republican win leads to long-term policies so fiscally irresponsible as to flirt...

"This week, Senior Research Fellow Veronique de Rugy gives an updated version of stimulus spending and unemployment based on the most recent data from the Bureau of Labor Statistics and the Center for Data Analysis. The administration’s promise that the ARRA bill would keep unemployment rates from breeching 8.8 percent and would create some 3 million jobs—90 percent of which would be in the...

Kates discusses Federal Reserve Chairman Alan Greenspan's fondness of Keynes, the failure of most public discussions to understand that tax cuts and public spending are not merely ways to stimulate the economy, the Japanese experience with Keynesian economics, and the reality that Keynes' ideas dominate most economic thinking so far in the...

"The Great Depression created a widespread misconception that market economies are inherently unstable and must be managed by the government to avoid large macreconomic fluctuations, that is, business cycles. This view persists to this day despite the more than 40 years since Milton Friedman and Anna Jacobson Schwartz showed convincingly that the Federal Reserve’s...

"As soon as the Obama administration-in-waiting announced its stimulus plan — this was before Inauguration Day — some of us worried that the plan would prove inadequate. And we also worried that it might be hard, as a political matter, to come back for another round.

Unfortunately, those worries have proved justified. The bad...

"More than three decades have passed since Richard Nixon, the Republican US president, declared: 'We are all Keynesians now.'

The phrase rings truer today than at any time since, as governments seize on John Maynard Keynes’s idea that fiscal stimulus – public spending and tax cuts – can help dig their economies out of recession...

Chart or Graph

"Japan's economy grow anemically over that decade, but as the nearby chart shows, its national debt exploded. Only in this decade, with a monetary reflation and Prime Minister Junichiro Koizumi's decision to privatize state assets and force banks to acknowledge their bad debts, did the economy recover. Yet recent governments have rolled back Mr. Koizumi's reforms and returned to their spending...

"In their responses to the financial crisis and recession, many countries have adopted policies that limit economic freedom. The negative effect of these policies on future growth rates is predictable and certain, and it is already beginning to be manifest in the data and in countries’ Index of Economic Freedom scores.

The recession’s impact was muted...

“[This figure] reports the impact of government spending increases implied by the American Recovery and Reinvestment Act in our model with rule-of-thumb consumers compared to the impact in the Smets-Wouters model previously shown in Figure 2. As one might have expected the GDP effect of ARRA spending is greater in the presence of rule-of-thumb consumers. However,...

"The Romer-Bernstein estimates are based on two particular quantitative macroeconomic models – one from the staff of the Federal Reserve Board and the other from an unnamed private forecasting firm. By averaging the impacts generated by these two models, they estimate that an increase in government purchases of 1 percent of GDP would induce an increase in real GDP...

“[The figure] presents the results of the simulation. The bar graph shows the increased government purchases as a share of GDP, and the line graph shows the impact of the increase in purchases on real GDP according to the Smets-Wouters model.

[…] According to the Smets-Wouters model, the impacts of this package on GDP are...

This chart and its corresponding article discusses the Keynesian-minded stimulus spending mainly enacted during the Obama administration. Edwards notes how the government recovery plan did not work by mentioning the following:

"Yet this was the recovery that was aided by the largest Keynesian-style big government 'stimulus' since World War II. Since 2008, total federal 'stimulus' has...

The chart shows how expenditures as a share of GDP spiked during World War II but were reduced rapidly and significantly. However, spending never returned to the pre-war level and has followed a general upward trend ever since.

"The unemployment rate started at 7.6 percent when President Obama took office and peaked at 10.2 percent in October of 2009. Since the enactment of the American Recovery and Reinvestment Act (ARRA) in February 2009, unemployment has not approached pre-ARRA unemployment rates again. Currently, $382 billion have been made available by government departments and agencies, yet, unemployment has...

"Another update to the chart used by the Obama administration to promote its stimulus package. (Real figures charted as red dots.) Professor Steve Horwitz says that it's time to call it a failure. It's hard to disagree. Even on its own terms, the stimulus has not delivered the jobs promised. In fact, the situation is worse than the projection of unemployment without the recovery plan.

...

Analysis Report White Paper

"The predominant, Keynesian, view of the effects of fiscal policy that was embedded in the large scale macroeconometric models of the seventies and eighties has come under attack. Theoretically, in the neoclassical approach that has developed in the last twenty years, government spending can have drastically different effects than in Keynesian models, particularly on private consumption....

"Both New Classical and New Keynesian macroeconomic theorists misunderstand and distort old Keynesian economics, alleging that its diagnoses and prescriptions depend on the indefensible assumption that money wages and prices are 'rigid.' Here it is argued that all Keynesian macro requires is that labor and product markets are not instantaneously and continuously...

"The debt crisis of the early 1980s prompted several analyses that emphasized the negative role of fiscal deficits on economic development. This negative view of fiscal deficits was consolidated in the so-called Washington Consensus agenda. International financial crises – recurrent in a world of true uncertainty with unregulated capital flows, and flexible...

"We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (Smets and Wouters, 2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly...

Ebeling, president of the Foundation for Economic Education, gives a brief introduction to the fundamental history and beliefs behind Keynesian economics. He then presents Henry Hazlitt's critiques of Keynes' ideas on economics, namely:

1) Keynes refused to recognize that the high unemployment of the 1920s (Great Britain) and the 1930s (United States) was caused by government...

"The doctrine of an inverse relationship between inflation and unemployment is a crude generalization of fictitious interaction between inflation and unemployment. It denies basic economic principles, obscures economic knowledge, and contradicts economic reality. Many Keynesians themselves are beginning to wonder whether the Phillips curve really exists."

"This paper argues that John Maynard Keynes had a targeted (as contrasted with aggregate) demand approach to full employment. Modern policies, which aim to 'close the demand gap,' are inconsistent with the Keynesian approach on both theoretical and methodological grounds. Aggregate demand tends to increase inflation and erode income distribution near full...

"Keynesian economics is a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation. Although the term has been used (and abused) to describe many things over the years, six principal tenets seem central to Keynesianism. The first three describe how the economy works."

Ebeling discusses how Keynes' ideas require the destruction of economic liberties in order to be implemented by central planners. He then goes on to discuss how such ideas differ from classical liberal views on human nature and government. The piece is begun with a mention of how Keynes prefaced The General Theory to German readers in Nazi Germany and concludes with the following...

"The Keynesian stimulus theory fails for the simple reason that it is only half a theory. It correctly describes how deficit spending can raise the level of demand in part of the economy, and ignores how government borrowing to finance deficit spending automatically reduces demand elsewhere. Exculpatory allusions to idle saving simply do not wash in a modern...

"Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modelling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an...

"A growing government is contrary to America’s economic interests because the various methods of financing government—taxes, borrowing, and printing money—have harmful effects. This is also true because government spending by its very nature is often economically destructive, regardless of how it is financed."

"This paper discusses the reemergence of Keynesian economics during the past decade. It highlights the substantial differences between new Keynesian economics and the convictions of early Keynesians. In particular, it points out that new Keynesians have adopted many views that were once considered 'monetarist' or 'classical.' It concludes that the terms 'Keynesian...

"Can deliberate government spending activities have a continuing net positive impact on economic activity? Do federal spending programs designed to offset a recession’s negative effects really add a net positive nudge to GDP growth? Can government purposefully and successfully stimulate ongoing employment growth?

Do federal government stimulus programs really work?"

According to David Henderson, "[w]e often hear that big cuts in government spending over a short time are a bad idea." Not surprisingly, Henderson disagrees with this Keynesian concept and seeks to...

"Tax cuts can deepen a recession if the short-term nominal interest rate is zero, according to a standard New Keynesian business cycle model. An example of a contractionary tax cut is a reduction in taxes on wages. This tax cut deepens a recession because it increases deflationary pressures. Another example is a cut in capital taxes. This tax cut deepens a recession because it encourages...

"When conventional economic wisdom repeatedly fails, it becomes necessary to revisit that conventional wisdom. Government spending fails to stimulate economic growth because every dollar Congress 'injects' into the economy must first be taxed or borrowed out of the economy. Thus, government spending 'stimulus' merely redistributes existing income, doing nothing to...

Video/Podcast/Media

"Greg Mankiw of Harvard University and Greg Mankiw's Blog talks about the state of modern macroeconomics and Keynes vs. the Chicago School. He defends his proposal to raise gasoline taxes and discusses the politics of tax policy."

"Ricardo Reis of Columbia University talks with EconTalk host Russ Roberts about Keynesian economics in the classroom and in research. Reis argues that Keynesian models are a useful framework for helping undergraduates understand macroeconomic ideas of general equilibrium. More generally, Reis argues, Keynesian ideas remain influential in macroeconomic research,...

"Steve Fazzari, of Washington University in St. Louis, talks with EconTalk host Russ Roberts about Keynesian economics. Fazzari talks about the paradox of thrift, makes the case for a government stimulus plan, and weighs the empirical evidence for a Keynesian worldview."

"Econstories.tv is a place to learn about the economic way of thinking through the eyes of creative director John Papola and creative economist Russ Roberts.

In Fear the Boom and Bust, John Maynard Keynes and F. A. Hayek, two of the great economists of the 20th century, come back to life to attend an economics conference on the...

The video discusses the battle over economic philosophy and policy prescriptions throughout the 20th century, especially focusing on the ideas of Hayek, Keynes, and Marx.

"Richard Epstein and John Taylor reflect on the global economic crisis of 2008 and discuss why the Keynesian narrative of events fails to identify and explain the causes at the root of the crisis. Epstein and Taylor evaluate the government responses to the crisis, assessing the effectiveness of TARP and President Obama's stimulus legislation. Finally, Epstein and...

"'Fight of the Century' is the new economics hip-hop music video by John Papola and Russ Roberts at http://EconStories.tv."

"Mr. Skidelsky talked about his book John Maynard Keynes: Fighting for Freedom, 1937-1946 published by Viking. The book examines Keynes's economic theories and his impact on British efforts to win World War II and his lasting influence on post-war politics." Skidelsky gives a fascinating account of Keynes' life and also discusses the difference between the...

In this video, economist John Maynard Keynes predicts that the British suspension of the Gold Standard will have positive results for the economy.

BBC Radio 4 will be recording a debate between modern day followers of Keynes and Hayek.

"Based on a theory known as Keynesianism, politicians are resuscitating the notion that more government spending can stimulate an economy. This mini-documentary produced by the Center for Freedom and Prosperity Foundation examines both theory and evidence and finds that allowing politicians to spend more money is not a recipe for better economic performance."

Kenneth Rogoff advocates for some more inflation to curb the effects of the recession and get back onto the path toward economic growth.

"Roger Garrison spoke to students attending Advanced Austrian Economics about macroeconomics and differing approaches of John Maynard Keynes and F.A. Hayek."

"So Krugman says wars are good for the economy? I guess wars are only good if we are fighting UFO's from the 'Twilight Zone' and a liberal is Commander in Chief."

"Robert Skidelsky and Nicholas Phillipson discuss how the philosophies of Keynes and Smith helped shape their influential economic ideas and examine how each has influenced social and political change."

Primary Document

"Concluding his most important book with those words in 1935, John Maynard Keynes was confident that he had laid down a philosophy that would move and change men's affairs. Today, some 20 years after his death, his theories are a prime influence on the world's free economies, especially on America's, the richest and most expansionist. In Washington the men who...

"In this book, Hayek provides an incisive critique of this fallacy in its Keynesian form and demonstrates the dire consequences of pursuing policies based on it. But the book contains much more than a critique of fallacious theories and policies: it holds the recipe for a solid and steady recovery from our current depression (and yes, always the straight-talker,...

Robinson was a follower of Keynes. In this book she discusses Marxism:

"But though Marx is more sympathetic, in many ways, to a modern mind, than the orthodox economists, there is no need to turn him, as many seek to do, into an inspired prophet. He regarded himself as a serious thinker, and it is as a serious thinker that I have...

"Vol. 8 of The Collected Works. Democracy in Deficit is one of the early comprehensive attempts to apply the basic principles of public-choice analysis to macroeconomic theory and policy. The book serves to bolster Buchanan’s central beliefs in the necessity of a balanced-budget amendment to the U.S. Constitution and in monetary rules rather than central...

"John Maynard Keynes, the man—his character, his writings, and his actions throughout life—was composed of three guiding and interacting elements. The first was his overweening egotism, which assured him that he could handle all intellectual problems quickly and accurately and led him to scorn any general principles that might curb his unbridled ego. The second was...

Essay embedded below.

About this volume of Hayek's collected works:

In 1931, when the young F. A. Hayek challenged the economic theories of John Maynard Keynes, sixteen years his senior, and one of the world's leading economists, he sparked a spirited debate that would influence economic policy in democratic countries for decades....

"John Maynard Keynes, late economic adviser to the British Government, is the new prophet of inflationism. The 'Keynesian Revolution' consisted in the fact that he openly espoused the doctrines of Silvio Gesell. As the foremost of the British Gesellians, Lord Keynes adopted also the peculiar messianic jargon of inflationist literature and introduced it into...

Hazlitt edited this 1960 volume of early reactions to Keynes at a time when most economists were devout Keynesians. For the most part, this book is a collection of writings by Keynes' earliest critics.

"The writer of this book was temporarily attached to the British Treasury during the war and was their official representative at the Paris Peace Conference up to June 7, 1919; he also sat as deputy for the Chancellor of the Exchequer on the Supreme Economic Council. He resigned from these positions when it became evident that hope could no longer be entertained of...

"This essay, which was published as a pamphlet by the Hogarth Press in July 1926, was based on the Sidney Ball Lecture given by Keynes at Oxford in November 1924 and on a lecture given by him at the University of Berlin in June 1926.

This essay is worth reading for especially two reasons. First of all, for the wealth of historical information about the origin of the laissez-faire...

In this famous book, Hazlitt tackles Keynes' General Theory piece by piece.

"Yet about the General Theory there is a strange paradox. The Keynesian literature has perhaps grown to hundreds of books and thousands of articles. There are books wholly devoted to expounding the General Theory in simpler and more intelligible terms. But on the critical side there is a great dearth. The non-Keynesians and anti-Keynesians have contented themselves...

I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general.

"'A camel,' it has been said, 'is a horse designed by a committee.' This might sound like a telling example of the terrible deficiencies of committee decisions, but it is really much too mild an indictment. A camel may not have the speed of a horse, but it is a very useful and harmonious animal—well coordinated to travel long distances without food and water. A...

"W.H. Hutt’s Theory of Idle Resources was first published in 1939, surely one of the earliest responses to Keynes’s General Theory.

Hutt goes for the heart of Keynes’s prescription for recovery, which was to get idle resources moving, whether that is money, capital, or labor. If something isn’t being employed right now, it is being wasted.

Hutt responded at length that there is...

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