WHY THE STIMULUS FAILED

WHY THE STIMULUS FAILED

Professor Bob

Obama’s trillion dollar stimulus bill was to have turned the economy around and reduced unemployment to an acceptable level.  Unfortunately it failed to accomplish either.  The government manages the economy through monetary and fiscal policy.  The Federal Reserve (Fed) handles monetary policy, much to the chagrin of many.  To those who would like to eliminate the Fed, remember that the duty falls to Congress if the Fed is eliminated.  Fiscal policy includes actions such as the stimulus bill and the tax laws.  During the Great Depression the government used fiscal policies without any significant impact.  Unemployment remained relatively stable and the economy did not come out of the tank until the country geared up for WWII.  In short, there was no sound economic history behind Obama’s stimulus bill to indicate that it would pull us out of the economic doldrums.  The GDP, the measure of economic output, is measured by summing Personal Consumption (C) plus Business Investment (I) plus Government Spending (G) plus net Exports (E –I): 

GDP = C + I + G + (E – I)

Funds for government spending must come from taxes provided by individuals or businesses or C and I.  So the only way that increased government spending can significantly add expenditures is to reduce the contribution of both individuals and businesses to GDP by increasing taxes on those two groups.  A major problem with trying to use government spending to stimulate the economy is that government is a non-profit entity.  Economic growth comes from profits generated by the private sector.  The only way that government spending can stimulate economic growth is for those funds to be funneled to the states and then to private sector entities such as road and bridge contractors.  The problem is that the stimulus bill did not do so.  Yes, the stimulus bill was sold to the American public as a bill to fund shovel-ready infrastructure projects.  In truth, only about five percent of the funds went to infrastructure.  The bill was largely a political vehicle used to payback Obama/Democrat supporters and had little to do with stimulating the U.S. economy.  A significant chunk went to fund an electric auto plant in Finland and several GM plants in China (the government outsourcing of jobs).  Money went to fund green energy companies of which more than a dozen have gone belly up (no clue who ended up with the money).  The real winners in the stimulus bill were labor unions and, in particular, state governments (and government employee unions).  It has been reported that the stimulus bill created 400,000 government jobs at the expense of 1,000,000 private sector jobs.  If the bill had gone to infrastructure it would have been wisely spent on needs of the country and the funds would have gone to private contractors who bid on infrastructure jobs.  Profit making firms would have benefitted which would have added jobs and the increased profits would have provided much needed tax revenue.  (Contrary to the logic of some, tax revenue is largely raised by economic growth which expands the tax base and not by increasing tax rates.)  The stimulus failed mainly because such a large portion of the funds went to state governments.  Of the money that most went to education, colleges and universities, research grants and other research funding.  The problem is that none of these areas of funding generate profits (thus, economic growth) and tax revenue.  State agencies are tax-exempt agencies that pay no federal or state income tax nor do they pay state sales tax.  So the bill actually harmed both the federal and state governments by inhibiting or curtailing much needed tax revenue.  The expenditures did not live on through profits which are reinvested by private sector business and promoting economic growth.  In other words, it was not possible for the bill could generate anywhere near enough tax revenue to pay for itself.  What is even worse is that monies went overseas, to failed enterprises, and to small operations that could not possibly have any positive economic impact on the U.S. economy.  If that money had simply gone to the public or to private sector businesses it would have had a more positive impact on economic growth and tax revenue.

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