If President Reagan used voodoo to form his economic policies President Obama certainly used his own peculiar brand of sorcery to conjure up the arcane $838 billion stimulus plan. Paradoxically the proposed measure which the Senate approved Tuesday is both too large and too small.
It is too large because the principle of government intervention in the free marketplace is fundamentally flawed. And it is too small because even presupposing that efficient government spending can catalyze the private sector the amount of money the stimulus package proposes to spend is inefficient to achieve the desired results.
Obviously the situation is perceived dire. People are hurting relatively. The economy is distressed to a degree. An air of anxiety made ever more contagious by the president’s eschatological economic rhetoric hovers over the country. Americans have lost faith in the free market. Naturally they wish to place that lost faith in something someone else. And they have.
With his words if not yet his actions Obama has gained faith and approval of the American people though a CNN opinion poll estimates that 45 percent disapprove of the stimulus package. By transitive property his policies will likewise receive faithful approbation by a Democratic Congress. Such enthusiasm and support is inspiring but it’s also dangerous. This “Newer” Deal smells of the 30s and like its predecessor it’s fundamentally flawed.
According to a January Congressional Budget Office report with the absence of a stimulus plan the unemployment rate could spike to nine percent or more by early 2010. Simultaneously an underutilization of American economic resources will likely result in a $2 trillion gap between the potential GDP and the actual GDP.
To combat this deadweight loss the proposed stimulus bill will drastically increase government outlays or spending in an attempt to close the $2 trillion gap. From the perspective of a central-planning Keynesian model – the anathema of true non-neoconservatives libertarians and quite generally any free-market oriented economist – the public spending will fuel the private sector and catalyze an improvement in the overall economy.
However Paul Krugman a Nobel Prize winning Keynesian economist said the $500 billion in public spending that the stimulus bill calls for will not close the gap. The stimulus bill will fall short of its aims even when taking into account the multiplier effect which predicts that every public dollar spent will account for a $1.5 output in the private sector.
The proposed tax cuts are equally problematic by assuming that the American public will spend rather than save. This assumption may prove true but the benefits will be transient: Some people will spend and some businesses will reap more revenue but in the long run the cuts will damage business investments.
Because taxes will be cut and money does not yet grow on trees loans will finance government spending.
This massive increase in federal borrowing will edge out private investors from investing in businesses because the more money the government borrows the more difficult it is for the investors to borrow money – a short term hidden externality but a long term disaster.
Obama believes in the Disney version of the New Deal – a great romantic triumph of central planning that freed the United States from the Great Depression. However contrary to myth government spending did not save the economy in the 30s – it prolonged the depression. And this time it may very well introduce one.