Five years later, it is obvious that President Obama’s stimulus was a failure.
This week marks the fifth anniversary of Obama’s 2009 stimulus plan, a $763 billion package of increased government spending and non-growth-promoting tax cuts that was supposed to be a panacea for all that ailed the economy still reeling from the 2008 financial crisis.
Yet five years later, the labor market remains in terrible condition, and the economy grew at just 1.9 percent in 2013.
Despite the obvious failure of the plan, the President’s Council of Economic Advisors (CEA) dutifully released a report to mark the anniversary, claiming that the stimulus provided a huge boost to the economy. The CEA report claims the stimulus saved or created 6 million job-years (equivalent of a full-time job for one year) through the end of 2012 and raised gross domestic product by 2 percent to 3 percent through mid-2011.
However, CEA’s estimates are not based on actual observations of the economy. Instead, they are generated by the very same models that supporters of the stimulus used to predict what they thought would be its highly beneficial economic impact in the first place.
Those models wrongly assume, as did supporters of the stimulus, that when the government increases spending by $1, the economy will grow by more than $1 because of the multiplier effect. According to this theory, when the recipient of increased government spending spends that money, the person he buys goods or services from then spends that money elsewhere, and so on and so forth for many iterations. Hence the impact of the original $1 increase in government spending multiplies across the economy.
It all sounds good in theory, but what adherents to this form of fiscal alchemy fail to account for is the negative multiplier effect. They forget that before the government can spend $1, it must first take that dollar out of the economy either through taxes or borrowing from the same credit markers individuals and businesses access when they need funds. In the case of the stimulus, the money was borrowed.
All that money that the government spent on the stimulus would’ve been borrowed and spent by the private sector had the government not borrowed it first. So for every dollar the government spent, someone in the private sector didn’t have that dollar available to spend, which means the business she would’ve spent the money at doesn’t get the opportunity to spend it either, and so on—just as in the positive multiplier effect described above.
Even if you believe the government can spend that money relatively efficiently, ultimately, the two effects cancel each other out at best.
All CEA did in its new report was to tell those same faulty models that the government spent the money it was planning to spend. And voila—the models confirmed their earlier flawed findings.
The stimulus was a bust, and the American people know it. No amount of re-running economic models will change that.