Free Market Fundamentalist Opinion

Why the Stimulus Was Bound to Fail

Keynesianism fails at a most basic level. It doesn’t agree that private investment not government spending generates growth.

In the wake of the 2008 financial meltdown, Congress enacted an almost $800 billion stimulus bill in the assumption that an artificial increase in consumer demand could propel the nation into recovery. The rationale was pure Keynesian economics — in times of crisis, the government should borrow, spend and boost demand to generate growth.

Two years later, it’s clear that the stimulus didn’t work. Unemployment is still over 9 percent and higher when including the millions of Americans who have simply given up looking for work. The $800 billion stimulus coupled with trillions in money printing by the Federal Reserve has driven up inflation while growth has stalled. Personal consumption expenditures are back to 2008 levels though. So why isn’t the economy recovering?

The reason is that Keynesianism fails at a most basic level — it doesn’t agree that production and trade create wealth. It argues that consumption (spending) does instead. The colossal failure of the Democrats’ “stimulus” and the Fed’s expansionary monetary policy should lay that theory to rest even if it hasn’t yet. There are still those who insist that the stimulus should have been larger and that the president should spend more, not less.

Let’s put that argument aside however and wonder what’s really holding the American economy back? It’s not a lack of spending. Consumer spending has recovered and the government is borrowing and printing trillions of dollars to “invest” money it otherwise doesn’t have. But it’s private investment that’s lacking.

Investment levels last year where 20 percent below their peak between 2006 and 2007. That peak was a bubble but private investment in 2010 barely equaled the figure for 2000. Considering that both the economy and the population grew over that period and experienced a normal rate of inflation, that’s a huge loss.

What’s stopping business leaders and investors from putting their money to work? Ask them and they point to Washington — “this administration is the greatest wet blanket to business and progress and job creation,” said one particularly blunt CEO. He knows that there’s a lot of money sitting on the sides.

You bet and until we change the tempo and the conversation from Washington, it’s not going to change. And those of us who have business opportunities and the capital to do it are going to sit in fear of the president.

If the government attempts to regulate businesses to such an extent that they don’t know what to expect next, who can blame them for deciding to sit on their money for a while and wait for the next election?

If, on the other hand, politicians want to stir investment and let businesses expand, there’s only one approach that works — good old supply-side economics.