Five Years Later...Why the Stimulus And Keynesian Economics Failed

Remember this chart:

This is what Obama's economic advisers predicted would happen with or without the passage of the $787 billion Stimulus Package (aka the American Recovery and Reinvestment Act of 2009).  Of course, implied in that chart is that economic activity, as measured by our Gross Domestic Product (GDP), would also return to normal levels by the First Quarter of 2014.

The plain fact is that real unemployment did even worse than Obama's "Without Recovery Plan" with the peak unemployment rate hitting 10.1% in 2010.  Today, when it should be at 5%, we are still struggling at 6.6%.  When Obama took office there were 155.2 million workers in the labor force.  Despite the fact that nearly 7.5 million new workers should have entered the workforce over the last 5 years, the number has only inched up to 155.4 million. That 7.5 million, euphemistically called discouraged workers, have just given up looking for work.  As a result, they are no longer counted as being in the workforce. So much for "real" job creation.

And, GDP?  Well, its seen the worst recovery since the Great Depression with an average of about 1.97% growth per year since the recession ended in 2009.   Normally, growth should be 50% greater than that; at 3% or higher. Obviously, the stimulus didn't work as promised; and, even today, three-quarters of Americans still think we are in a recession.

While there are several reasons why Obama's Keynesian-Style Stimulus Package failed, the primary reason lies in the false belief that, when the economy slips into recession as a result of slack consumer spending, that lack of spending can be made up by increasing government expenditures.  But, this is just ridiculous.  The simple fact is that consumers don't spend like governments.  They don't build roads or bridges and they don't spend their money fixing them.  So, instead of stimulating the existing parts of our economy that are in the process of dying off, the Keynesian stimulus winds up  stimulating a subset of the economy that had nothing to do with the reason that the economy faltered in the first place.  What's worse, most of these projects have a low labor cost to materials and equipment costs ratios.  That is why you wind up with statistics that show that, at the very least, it cost the taxpayers $185,000 for each job that was supposedly created.

Another problem with using federal and state construction projects as a means of trying to stimulate the economy is the fact that any spending and job creation will always be short lived.  If the project is 1 month long or 3 years long, that part of the economy that is being stimulated will only benefit as long as the project is still alive. Once its over, so are the jobs and so is the spending.

Lastly, there's the argument by the Democrats that every dollar spent returns $1.50 in economic activity.  To some extent that's true, but $1.50 is an average.  Depending on how labor intensive the  effort is, the returns will range between 70 cents (a loss) and $1.90.  Heavy construction projects are more towards 70 cents than anywhere near $1.50 because the labor costs are so low relative to the overall cost of the project.  Thus, the potential for any true economic expansion is lost. More importantly, the stimulus is a drag on everyone's wallet because deficit spending devalues all the dollars that are in the economy.   This weak dollar effect means that things will cost more; especially imported items.  For example, oil, which is priced worldwide on the basis of the strength or weakness of the U.S. dollar, has dramatically risen since 2009.  The result has been that gasoline prices rose from $1.74/gallon in 2009 to the current rate of $3.63. This is despite the fact we are now awash in new, domestic oil as a result of fracking and other new technologies. In contrast, natural gas, which is not traded in terms of the value of the dollar, has seen its prices fall from $12.49 a cubic ton to $9.40 from 2009 to 2012.  All because of fracking.

Despite whatever spin the White House puts on the stimulus results, it was nothing but a failure and, I think, definitive proof that Keynesian economics is simply another tool for left-wing politicians to grow the government and redistribute wealth.

References:

The Worst Four Years Of GDP Growth In History: Yes, We Should Be Worried: http://www.forbes.com/sites/realspin/2013/04/12/the-worst-four-years-of-gdp-growth-in-history-yes-we-should-be-worried/

As Obama starts sixth year, 74 percent say US still in recession: http://www.foxnews.com/politics/2014/01/22/fox-news-poll-as-obama-starts-sixth-year-74-percent-say-us-still-in-recession/

White House Says The Stimulus Cost Per Job is $185,000; not $278,000: http://www.nationalreview.com/campaign-spot/271107/white-house-nuh-uh-stimulus-jobs-only-cost-185k-each

Politifact: Every Dollar of Spending Returns Between $0.70 & $1.90 in Increase Economic Activity: http://www.politifact.com/truth-o-meter/statements/2010/jul/27/jeanne-shaheen/lawmaker-claims-unemployment-benefits-boost-econom/

A Scorecard on the economy under Obama: http://www.politifact.com/truth-o-meter/article/2012/jun/01/scorecard-economy-obama/

Obama's Indirect Tax Through Keynesian Economics

Even this tax-and-spend President has agreed that raising taxes during a weak economic period is a bad idea because it would further exacerbate an already languishing economy. But, indirectly, that's exactly what he and his previous completely Democrat-controlled Congress did through a massive "stimulus" spending program.

John Maynard Keynes, certainly the pure consciousness of Keynesian economic theory, correctly assumed and stated that the total aggregate demand (spending) in any economy is a direct result of the spending activity by (1) the public sector (state, local, and federal governments) and (2) the private sector (consumers and business). Further, he theorized that "if" private sector demand fell during an economic downturn, the economy could be righted, again, by simply increasing the amount of spending by the public sector; and, thus, offsetting any loss of demand in the private sector. In theory, it seems so elegantly simple and logical. Thus, we have the basis of "stimulative" spending that almost every Democrat believes to be the key to good recession-beating economics.

But, what Keynes (and the Democrats) totally missed the boat on, is the fact that all that stimulative spending would severely devalue our currency. In fact, in the last 2-1/2 years, the the U.S. dollar has lost more of its value against a market-basket of other key currencies than it had in the 15 years prior to Obama taking office. And, in an economy, like ours, which is so dependent on consumer spending and with a consumer who is so dependent on imported goods, this is pure economic poison.

In our economy, the consumer reigns king; normally representing about 70% of our total economic activity. The remaining 30% is comprised of a combination of public sector and private business spending. So, if, in any way, you hamper the consumer's ability to spend money by diverting a bigger chunk of their paycheck to either higher or new taxes or through higher prices, the economy would be doomed to falter; a fact that we are now seeing after having spent trillions to supposedly "stimulate" the economy.

The reality is that the consumer's paycheck has been under assault by the continuing devaluation of the dollar; which, in turn, has driven import prices higher and higher. In fact, in the last Import Price Report, the "average" of all import prices rose 13.6% -- year over year -- while the American paycheck has remained fairly stagnant. As a result of this inflation, the American consumer has seen their gasoline expenses double under Obama's watch; with the "average" 2-car family now paying about $2000 more per year. (Please note: The doubling of gasoline prices is only partly driven by the dollar's loss in value. The rest of the price inflation is due to the speculation that future demand could outstrip supply; eventually making world oil prices skyrocket. The demand side of this speculation is also being driven by the increasing need for oil by some rapidly emerging economies such as China and India. In addition, the instability in the Middle East could result in supply shortages. Also, there are foreseen supply limitations in this country due to Obama's anti-drilling policies; especially since America, with only 5% of the world's population, uses 25% of world's entire oil supplies.)

On top of higher oil prices, the consumer has seen their average food bill rise by almost 30% since 2009. That's because much our nation's food bill is for imported products. For example, 70% of our seafood comes in from other countries. Most all of the nation's fresh, off-season fruits and vegetables are imported. Even that morning caffe latte is dependent on coffee being brought in from places like Columbia. In addition, food prices are also very sensitive to rising energy prices. That's because gasoline and diesel fuels and electricity are heavily involved in every aspect of food production and in the delivery to market. While I have not been able to determine an exact number, my guess is that an average family of four has seen their food bill rise by at lease $2200 a year since the value started dropping in 2009.

Also, in a surprising way, domestically grown foods and food products are seeing prices rise as a result of the devalued dollar. That's because, as the dollar weakens, our farm goods and our manufactured goods actually become cheaper; overseas. That may seem like a good thing; and, for the most part, it is. But, it also has an adverse effect by increasing the demand for all those now-cheaper American farm goods that are supply-limited due to the fixed available acreage that can be dedicated to that products production. In effect, as our products get cheaper overseas, we find ourselves competing with the rest of the world for our own farm products. As a result, the extra demand -- given effects of the Law of Supply and Demand --- causes prices to rise domestically. Sometimes, farmers, seeing a more lucrative opportunity for an exporting farm good, will switch crops to a more attractive and profitable exportable product. When this happens, a supply-void occurs for the farm product being abandoned. As a result, that product, too, will see its prices rise as supplies decline.

The bottom line is that the stimulus package, by virtue of a weakened dollar, is actually having the opposite of its intended effect because it, for the most part, hurts the primary driver of the economy: the American consumer. Added to this, consumer spending is being further eroded by all the new taxes and increases on existing taxes that are being applied by individual state, county, and local governments across this country, as those governments try to push back against their rising deficits. But, as in the case of the weakened dollar, raising taxes just causes the economy to decline even further; thus, conversely, causing deficits to increase from an economy that gets even weaker.

I believe that the adverse effects of the stimulus spending (and taxes) can be clearly seen in the chart (below) which shows that our economic activity declined as more and more stimulus money (and taxes) is applied:

Prior to the application of any stimulus funds, the economy was actually on the mend as noted by this chart of Gross Domestic Spending:

Visually, there is an obvious change in our economy's direction as the stimulus money rolls out. The chart above clearly shows how the economy was recovering and, if left alone without stimulus funds, it would probably be doing fine right now. Instead, we are on the verge of going negative; once again.

I just think the economy would have been better served by reducing the amount of Federal spending; not increasing it. In that way, import prices would have actually fallen because the dollar would have strengthened. This, then, would have promoted increased consumer activity and that would have resulted in renewed hiring instead of the increased unemployment we have now. While it is a fact that exporting corporations might have been hurt by strengthening the dollar -- making their products more expensive in the world marketplace -- that fact could have been easily mitigated by reducing the corporate tax rate. Furthermore, Congress could have helped stimulate corporate business activity by passing legislation that would have allowed multinational companies to return profits back to the U.S. without any penalty of Federal taxation. Right now, those profits would not only be taxed in the foreign country in which they were earned, but also by the U.S government; should any of those profits be returned to this country. As a result, much of those funds are used to help the economies of the countries of origin and not the United States.