Thursday, June 11, 2009

Economic Stimulus Spending: 93% Spending & 7% Stimulation?

One of the themes of this blog is that people in general and politicians in particular do not understand basic macroeconomic policy well enough to make wise choices.

An example of this comes from Republican Senator James Inhofe of Oklahoma, who issued the following statement on February 6, 2009 in response to a compromise agreement on a spending bill to stimulate the U.S. economy:
"While I appreciate the efforts of my colleagues to bring down the price tag of this bill, the fact is we still face a trillion dollar spending bill. Making it worse, the bill is 93% spending and only 7% stimulation. Over the past few days I have fought to include more in the way of real stimulus through higher percentage of infrastructure and defense spending, while working to cut much of the typical government waste often found in a bill of this size. Yet Democrats have blocked these efforts.

"The good news tonight is that the American people are catching on to the fact that this is the largest spending bill in history and are becoming more and more vocal in their opposition. My offices in Oklahoma and Washington DC have been flooded with emails, phone calls and faxes overwhelmingly opposed to this trillion dollar legislation. They can rest assured that my vote remains an unwavering ‘no.'"

The primary cause of recessions is insufficient overall spending on newly produced goods and services. Consequently, the prescription for reversing a recession is to increase SPENDING. If the goal is to expand the U.S. economy (and thus reduce unemployment), spending on almost any newly made products by U.S. workers is beneficial.

Senator Inhofe does have a point, however, even if it is poorly expressed. Some types of spending are more beneficial than others. For example, if the federal government hired U.S. workers to manufacture millions of plastic pink flamingos to decorate the lawns of all government land, there would be a benefit to the economy. And if the concern is bringing the economy out of recession, this seemingly wasteful spending does help by providing employment and income.

Yet, plastic pink flamingos do not provide any long term economic benefit. Other types of government spending, such as the construction of roads, highways, and bridges, would improve future economic growth. The problem is that infrastructure projects can take an extremely long time to complete. And if the purpose of the spending is to stimulate the economy now, the government may wish to consider projects that can be implemented more quickly, even if they have fewer long-term benefits.

See also "Recessions & Depressions: Questions & Answers."

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