The CBO Claims ARRA Stimulus is Driving Recovery

The CBO director claims it on his blog.

However, there’s an important qualifier on all of that data:

Although CBO has examined data on output and employment during the period since ARRA’s enactment, those data are not as helpful in determining ARRA’s economic effects as might be supposed because isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about ARRA’s impact.

Now, I’m just going to go out on a limb here and suggest that in the absence of the law, our economy would’ve taken a path similar to that which the economies of Europe, Japan, and Southeast Asia took, considering they all abandoned the idea of stimulus after the Greek crisis.

To claim that the ARRA “increased the GDP by 1.7%-4.3% in the second quarter” is absolutely absurd, considering the 2nd quarter GDP growth was 1.6%. They’re basically claiming that no recovery occurred, except that which was brought on by the ARRA, and without the ARRA we would have been back in a recession, possibly to the tune of -2.7%. I cannot express in words how absurd it is to think that without this president’s policies, we’d still be in recession. Economies naturally recover from recessions much faster than that, and the evidence is plastered all over our history and the current outlook of countries around the world who chose not to use Keynesian stimulus.

To describe the effect of a stimulus, consider this example (I’m in the market for an espresso machine, so espresso machines get to be the product in question):

We’re in the middle of a recession, and consumer spending is down. You have $150 in the bank (after taking some hard losses), and are looking for an espresso machine. Company A has an espresso machine selling for $100, but after reading the reviews on Amazon and considering your own financial situation, you decide this espresso machine is only worth $70 to you. However, the government comes to the rescue and offers a stimulus to the company of $60 for every espresso machine they sell. With the government paying for part of every machine, the company lowers the price to $40. Suddenly, that machine is worth buying!

You pay $40 for it, and end up with a final value of $110 in the bank and an espresso machine (worth $70 to you) = $180. A transaction has occurred, so consumer buying increased, and the stimulus is a success!

However, the government can’t just create value out of nothing (they can create money out of nothing, but that merely means each unit of currency has less value– inflation is effectively a regressive tax). So they are now in debt for that $60. In order to recoup their losses, they have to raise taxes in some way. So, using some combination of complicated legal maneuvers and lots of obscure redefinitions of the word “tax,” they extract $60 out of you to pay their debt.

Now, you’re left with $50 in the bank + an espresso machine worth $70 = $120 in value. That means $30 in value has been destroyed by this transaction. You now feel poorer and less happy than you would have if the government had done nothing.

So, if they want to say the stimulus directly created enough jobs to lower the unemployment rate by 1%, fine, there’s no arguing that. But the CBO specifically points out that they’re ignoring indirect effects on employment. So that 1% is the part in my previous example where the $70-valued espresso machine is bought for $40, and we call the stimulus a success. But then, the the government has to pay for the stimulus. That’s why Obama wants to let the Bush tax cuts expire, and that’s why the Democrats included so many new taxes in Obamacare, and that’s why the Federal Reserve is deliberately inflating the currency. Those, coupled with the new costs to business associated with the regulatory framework of Obamacare have completely destroyed all incentive to hire right now. So great, we created enough jobs to lower the unemployment rate by 1%, but we probably destroyed enough jobs to raise the unemployment rate by 2-3% from what it would’ve been in a natural recovery curve. This is why unemployment is still so high.

And of course, all of this has an indirect effect on the GDP. We had a temporary GDP spike as the stimulus money was spent, and now we’re in the middle of an even bigger GDP growth slump as the impending taxes to pay for the stimulus result in an economic hangover. This is the natural effect of Keynesian economic policy, as Friedrich von Hayek explained. As Hayek would say, the GDP spike we had last spring was the Boom from the Keynesian stimulus. Now we’re in the middle of the Bust that inevitably results, hence the stagnated growth, high unemployment, and attempts by the Federal Reserve to devalue the currency.

Hayek has been dead for 18 years, and yet, his description of the effects of Keynesian policy predict our current situation beautifully. There’s nothing “unexpected” about it.

UPDATE: A comparison between the “stimulated” U.S. economy and the financial-austerity-focused German economy. Germany also had a little spike in September 2009 from their much smaller stimulus, followed by a crash. It’s not until they adopted their financial austerity measures that their economy rallied. A government trying to stimulate the economy is like a passerby trying to move someone who just broke their neck before the ambulance can get there. Good things come to those who wait…

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