Why Government Spending Does Not Stimulate Economic Growth: Answering the CriticsPublished on January 5, 2010 by Brian Riedl
Abstract: Despite decades of repeated failure, President Obama and Congress continue to promote the myth that government can spend its way out of recession. Heritage Foundation economic policy expert Brian Riedl dispels the stimulus myth, lays out the evidence that government spending does not end recessions--and presents the evidence for what does end recessions. Hint: It's not another "stimulus package."
Proponents of President Barack Obama's $787 billion stimulus bill continue to insist that the massive government bailout played a decisive role in moving the economy out of the recession. Yet assuming no destructive government actions, the economy's self-correction mechanism was widely expected to move the economy out of recession in 2009 anyway. With a parade of "stimulus" bills the past two years (going back to President George W. Bush's tax rebate in early 2008), it was entirely predictable that some would link the expected end of the recession to whichever stimulus bill happened to come last.
Indeed, President Obama's stimulus bill failed by its own standards. In a January 2009 report, White House economists predicted that the stimulus bill would create (not merely save) 3.3 million net jobs by 2010. Since then, 3.5 million more net jobs have been lost, pushing the unemployment rate above 10 percent.[1] The fact that government failed to spend its way to prosperity is not an isolated incident:
During the 1930s, New Deal lawmakers doubled federal spending--yet unemployment remained above 20 percent until World War II.
Japan responded to a 1990 recession by passing 10 stimulus spending bills over 8 years (building the largest national debt in the industrialized world)--yet its economy remained stagnant.
In 2001, President Bush responded to a recession by "injecting" tax rebates into the economy. The economy did not respond until two years later, when tax rate reductions were implemented.
In 2008, President Bush tried to head off the current recession with another round of tax rebates. The recession continued to worsen.
Now, the most recent $787 billion stimulus bill was intended to keep the unemployment rate from exceeding 8 percent. In November, it topped 10 percent.[2]
Undeterred by these repeated stimulus failures, President Obama is calling for yet another stimulus bill.[3] There is every reason to expect another round to fail as miserably as the past ones, and it would bury the nation deeper in debt.
