Bittlingmayer, Havenner and Hazlett on the Stimulus

George Bittlingmayer, Art Havenner and Tom Hazlett, three of my professors at U.C. Davis, teamed to write, "They Don't Call It Stimulus No More" for Real Clear Markets.  They argue that the American Recovery and Reinvestment Act has failed to achieve the goals promised by its supporters, the failure of the bill is yet another nail in the coffin of Keynesian economics, and the large deficit produced by the bill will hinder long-run economic growth.  The article is well written.  I quote a few of my favorite paragraphs.

Despite the debate raging over whether the $787 billion "stimulus package" passed by Congress in February 2009 worked, the argument is over: the Obama Administration has capitulated. And it was on display in the President's signing ceremony last week for the next round of federal economic elixirs. No government official dared to call the $18 billion spending package anything but a "jobs bill."

Hello. The spending strategy unveiled a year ago was Keynesian - fatter federal deficits would jolt investor sentiments, igniting capital spending and putting Americans back to work in the private sector. That's the theory.

But now, besieged with prolonged high-level unemployment, the President and his congressional allies have put forward yet another deficit-enhancement plan. The "stimulus" tag has been abandoned; this is a jobs bill. And the rhetoric defending last year's spending binge has been duly adjusted, trumpeting the school teachers and fire fighters who kept their jobs due to credit extended to the states by the Federal Government.

The change is anything but subtle, and is entirely appropriate: massive U.S. deficits aren't stimulating private sector job gains...

President Obama blames the Bush Administration for the high cost of government - a bad situation that existed "when I walked in the door." One need not dwell on the fact that Senator Obama went to Washington in 2004 and proceeded to vote for the spending he now tags as profligate. The point is extremely well-taken: Bush43 did a fiscal belly flop, drenching the national ledger in red ink. For that, he is rightly held in low esteem, and his party swept from office.

Now the Democrats are making Mr. Bush's failures their own. Mushrooming deficits have not saved the economy. Even assuming that job losses have bottomed out, today's optimistic scenario, no post WWII recession has taken longer to turn around. And no recession has suffered employment losses so steep in percentage terms. This might be blamed on a Republican predecessor too, but for the fact that such a debacle was precisely what the Obama Administration forecast would be avoided by the February 2009 "stimulus."

Now, fiscal dereliction poses threats of its own. Economists Carmen Reinhart and Kenneth Rogoff have written the book on financial crises in history, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY (Princeton, 2009). Just as the low-visibility risks taken by Fannie Mae and Freddie Mac appeared to be a free political lunch up until the fateful instant that they proved calamitous, sovereign debt can be a silent killer. The national debt, being pushed substantially higher just as the Baby Boomers retire, only looks harmless. But, "at some point," write the authors, "interest rate premia react to unchecked deficits." Fiscal "stimulus" must be withdrawn; austerity results. And "higher taxes have an especially deleterious effect on growth."...

Like a rain dance that produces no clouds, we are now into our fourth round of federal deficit creation - the automatic "stabilizers," followed by the Bush (2008), Obama I (2009), and Obama II (2010) versions. With each dry day, the deficit dancing intensifies. When the rain finally falls, we will be told that the recovery is a tribute to the Keynesian Gods. But it's already clear that something has gone wrong: the "stimulus" chant has fallen silent. Our dance on a fiscal cliff has lost its theme music.