Why the stimulus failed

By Arthur C. Brooks

History shows that government spending and social-engineering programs don’t spur growth.

Ask most Americans about the big-spending government policies of the last few years, and they will tell you the programs have failed. In a February 2012 poll from the nonpartisan Pew Research Center, 66 percent of Americans said the federal government is having a negative impact on the way things are going in this country (versus 22 percent who say the impact is positive). A majority disapproves of the president’s 2009 stimulus, and according to a 2010 CNN poll, about three-quarters of Americans believe the money was mostly wasted.

Of course, the measure of economic success is not public opinion, but the factual effects of policy. The emerging evidence on various spending programs shows that Americans’ intuition is correct: The Keynesian deficit spending has been poorly designed and badly executed, and it has had little benefit for our economy.

As just one example, consider the infamous “Cash for Clunkers” program, the $3 billion federal plan that allowed people to trade in an old car in exchange for about $4,000 off the purchase of a new one. The administration argued it would stimulate the U.S. economy and improve the environment. Critics saw it as a way for the government to prop up the car companies it had recently bailed out. But whatever the motivation, the program was a bust. Economists at the think tank Resources for the Future have found in a new study that the program did not stimulate the economy, and that 45 percent of the money went to people who would have bought a new car anyway. In other words, the administration could have cut out the overhead and simply handed out $1.35 billion to random people on the street.

The ineffectiveness of this program is illustrated by rigorous economic analysis. But Americans know in their hearts that they could drop the needle almost anywhere on Obama’s Big Government Spending Album and get the same basic results: lots of spending with little to show for it.

The reason is straightforward. As many economists have found, most government spending has relatively little effect on the economy, and any effects are generally short-lived. For example, Harvard economist Alberto Alesina and his colleagues show in a new National Bureau for Economic Research study across many countries that government spending has little connection to GDP growth, making spending cuts ideal for balancing budgets without provoking a recession — but this also means that spending does little to stimulate economies. Alesina finds, however, that tax changes have large macroeconomic effects; that is, tax increases reliably depress the economy.

In a nutshell, Cash for Clunkers and all the other social-engineering programs of the past few years won’t succeed as promised to assist economic recovery, because they cannot. And the tax increases at the center of Obamanomics will dig our hole even deeper. What would work to spur our country’s financial growth is more economic freedom — not more government spending.

Again, this is not political dogma, but empirical reality. A new study published in the International Review of Economics shows that there is a direct and clear link between economic freedom and prosperity. Studying economic-freedom measures ranging from tax rates to regulation to government spending, the study authors find that from 2004 to 2008, economically freer OECD countries consistently outperformed those that were less economically free.

Is the prescription for the next administration, then, no government spending, and a move toward a minimum-tax, super-capitalist state that will gut all public services? The administration would have Americans believe that is the philosophy of today’s Ryanista Republicans. As President Obama put it in his Osawatomie, Kan., speech last December, “Their philosophy is simple: We are better off when everybody is left to fend for themselves and play by their own rules.”

This is nonsense. Conservatives today understand the importance of a reliable safety net for the truly indigent and the necessity of dealing with certain market failures. Further, there is universal support on the political right for opportunity-equalizing government policies, such as publicly funded education (ideally, administered for the benefit of children as opposed to rent-seeking bureaucrats and teachers’ unions).

But conservatives also know that when it comes to economic progress, the best government philosophy is one that starts every day with the question, “What can we do today to get out of Americans’ way?” In other words, the president should not ask what new agency or program the government can create to stimulate, bail out, or redistribute from this group to that one. That will ultimately add to our problems, rob more from our children, and make it harder to create the jobs, opportunity, and growth our country needs. The president should instead ask these questions: What tax barrier to small business can we lower; what competition-killing regulation can we rescind; what unfair crony-tax loophole can we close?

These are not new insights. Thomas Jefferson summarized them best when he famously said:

A wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.

Most Americans understand these truths, and the next administration must hew to them if it wants to succeed in breaking our government out of its cycle of incompetence, failure, and excuses. This is not political propaganda or an untested theory. It is practical reality based on economic truth.

— Arthur C. Brooks is president of the American Enterprise Institute and author of The Road to Freedom.

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