Morning Bell: There They Go Again

Conn Carroll / October 10, 2008

Earlier this year the left in Congress and the White house pushed through a $152 billion economic stimulus package that they assured us what keep the economy out of recession. It didn’t work. In late July, when the White House sought the power to take over Fannie Mae and Freddie Mac, the left insisted on $5 billion in new spending for a ‘affordable housing trust fund‘ to help stabilize housing prices. That didn’t work. Just last month, the White House and Congress pushed through a $700 billion bailout of Wall Street assuring us it was the only option to keep the financial crisis for spiraling out of control. So far that hasn’t worked either. Now Speaker Nancy Pelosi has announced that Democratic leaders will hold a meeting with “a group of economists” next Monday to pressure Republicans to support another $150 billion in new deficit spending. As Ronald Reagan told Jimmy Carter in their 1980 debate, “There you go again.”

Details on Pelosi Plan 4.0 are not firm yet, but early indications are it calls for significant new government spending, particularly on infrastructure (Pelosi’s theory being that the new spending will create new jobs). Hopefully some of the economists will set her straight on Monday. As a 2000 Department of Transportation study showed, infrastructure spending only shifts jobs from one sector of the economy to another.  And even then, the government induced shifting of jobs from sector to sector comes at a steep cost. A 2004 Government Accountability Office study found that the Emergency Jobs Appropriations Act of 1983 did ‘create’ 35,000 new jobs but at a cost of $257,142 per job ($546,136 in 2007 dollars). Pelosi might as well just drop government money from a helicopter.

Which, by the way, is what the rest of her plan basically does by extending unemployment and other welfare benefits. While this may serve some socialist redistribution of income goals, the economic literature is very clear that it does nothing to stimulate the economy. Government spending cannot significantly affect demand since it merely redistributes existing purchasing power, but it can alter supply by altering the productivity rates of people and businesses. Witness:

• Public Finance Review: “[H]igher total government expenditure, no matter how financed, is associated with a lower growth rate of real per capita gross state product.”
• The Quarterly Journal of Economics: “[T]he ratio of real government consumption expenditure to real GDP had a negative associa­tion with growth and investment,” and, “Growth is inversely related to the share of government consumption in GDP, but insignificantly related to the share of public investment.”
• The Journal of Macroeconomics: “[T]he coefficient of the additive terms of the govern­ment-size variable indicates that a 1% increase in government size decreases the rate of economic growth by 0.143%.”
• Public Choice: “[A] one percent increase in government spending as a percent of GDP (from, say, 30 to 31%) would raise the unem­ployment rate by approximately 0.36 of one per­cent (from, say, 8 to 8.36 percent).”

Economic growth is driven by individuals and entrepreneurs, not by Washington politicians. Massive Keynesian spending hikes in the 1930s, 1960s, and 1970s all failed to increase economic growth rates. Yet in the 1980s and 1990s—when the federal government shrank by nearly 20 percent of gross domestic product (GDP)—the U.S. economy enjoyed its greatest expansion ever. Congress should learn from its previous mistakes, including the first stimulus bill, and not consider proposals that increase the debt and do lit­tle to boost the economy.

Quick Hits:

• A new report by Federal Housing Finance Agency reaffirms that Fannie Mae and Freddie Mac are still undercapitalized.
• Yesterday a federal judge ruled that Ohio Secretary of State Jennifer Brunner (D) is breaking federal law by not giving county elections boards the chance to determine whether new voter registrations are fraudulent.
• According to Gallup, while 6% of voters say they are less likely to vote for Barack Obama because of his race, 9% say they are more likely to vote for him, making the impact of his race a neutral to slightly positive factor.
• In the most visible sign of the surge’s success, miles of hulking blast walls are slowly being dismantled in Baghdad.
• According to Rasmussen Reports, 36% of baseball fans think the Red Sox will win the World Series, while 24% think playoff newcomers the Tampa Bay Rays will come out on top.