Why the stimulus failed

November 8, 3:23 PMStafford County Conservative ExaminerMelissa Short

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Unemployment rose from 9.8% to 10.2% in October, accroding to the Bureau of Labor Statistics, which also reported a loss of 190,000 jobs. Obama’s promise to tackle unemployment and to “save or create” three to four million jobs by 2010 seems ambitious (and difficult to measure objectively; how do you know if you “saved” a job?). Given the recent rise in unemployment and dramatic increase in the deficit, it’s no wonder that some are highly skeptical of the success of his stimulus plan.

The concept of Keynesian stimulus is simple. Essentially, the stimulus is based upon the multiplier effect: the GDP is supposed to expand beyond the initial amount of government spending. When the economy reaches a slump, the suggested government solution is to inject funds into the economy in order to receive a multiplied result. J.D. Foster explains why the theory is unsuccessful:

The Keynesian stimulus theory fails for the simple reason that it is only half a theory. It correctly describes how deficit spending can raise the level of demand in part of the economy, and ignores how government borrowing to finance deficit spending automatically reduces demand elsewhere.”

Ultimately, the “benefits” of the stimulus balance out and leave us where we started. This is obvious if we pay attention to October’s unemployment rise. What’s more, we’re left with a larger federal deficit than we started and little to no improvement in the economy. One of my former professors, Paul Kengor, put recent government spending into perspective by comparing Obama’s spending to Reagan’s:

Ronald Reagan increased the deficit by 35 percent in eight years, whereas Barack Obama has increased the deficit by 450 percent in eight weeks. Reagan created an extra $37 billion in annual deficit. Obama has already created an extra $1.4 trillion in annual deficit.”

So if government spending can't provide a truly successful method of economic recovery, then what can? Recent research reveals that tax cuts are a more effective way to increase the GDP than federal spending. In addition to returning to true fiscal responsibility, a proven way to “stimulate” the economy is to let free market forces operate independently of excessive government regulation. That is, allow free individuals and entrepreneurs to stimulate the economy with their own economic activity instead of depending on an unprecedented rate of government spending and increased debt.