Is the stimulus working? The Wall Street Journal Editorial Board doesn’t think so. Read today’s editorial, It isn’t working. Here are a couple of key paragraphs (emphasis mine):
So far the Obama team has thrown the entire Keyensian playbook at the economy. We have paid people to buy cars, purchase homes, pay off their mortgages, weatherize their homes and put solar paneling on their roofs. And of course there was the original stimulus package of $862 billion, though some of that remains unspent. None of it has put America back to work.
The policy lesson is that you can’t have a jobs recovery without private confidence and investment. The Obama crowd bet that you could force-feed private investment with government spending and politically directed credit, but the result has been to traumatize business instead. Why would a small business owner hire anyone new if he knows that taxes are going up, health-care costs are sure to rise, and the cost of each new employee is uncertain? Nor can you inspire business confidence if you demonize bankers and business.
Take a look at the bold sentence.
Those who believe Keynesian economics (named after economist John Maynard Keynes who thought government could keep the economy going in a an economic downturn by increasing government spending) will tell you the reason government spending truly stimulates in a downturn is because of high unemployment.
First, let me explain what I mean by “truly.” A common objection to Keynesian economics is that when the government spends money it doesn’t really add anything to the economy because it essentially takes that money from somewhere else in the economy, whether it borrows it or takes it out of taxes. Either way, had the government not spent the money, whomever lent the money or paid the taxes would have used it for something in the economy, so the net effect of the government taking it to spend is not positive, it’s just better seen.
Keynesians say this isn’t true in times with high unemployment. Since so many people are unemployed and people may be hoarding their savings, this money would not have been spent, so having the government spend it adds to the economy.
I believe the bold sentence from the WSJ editorial above shows another effect of increasing spending and getting too wrapped up in the economy. When you “traumatize business” you make business managers very sensitive about investing money. Another way to say this is uncertainty. When you’re uncertain about your future, you tend to hunker down.
Even if Keynesians are correct that high unemployment reduces the opportunity cost of the government spending, they pay less attention to increasing opportunity cost of government spending from increased uncertainty in the marketplace.
Maybe you heard Milton Friedman’s phrase: “There is no such thing as a free lunch.”
What he means is that we think we are getting a free lunch (like producing a net positive improvement in a bad economy by increasing government spending), we are probably just neglecting to account for one of our opportunity costs.