Why stimulus policies don't work, and why the 2013 outlook is dark

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Recent economic news has been dismal: Unemployment remains stubbornly high, European economies spiral downward, stock-market investors become more nervous, and to add more turmoil, politicians spawn a “fiscal cliff” for January 2013.

Meanwhile, White House officials continue to misdiagnose the suffering patient by suggesting more of the failed policies – additional stimulus spending, more monetary easing and ever more costly regulations.

Economists generally agree that a fiscal stimulus policy consists of two elements. The first is a deficit-spending effort, especially on consumption; the second, an emphasis on providing private incentives (tax relief and reduced regulations) to spark risky, private investment (e.g., the purchase of durables and working capital), which are crucial towards making the stimulus effective. By increasing employment and gross domestic product, it prompts the feedback to sustain both further consumption and economic activity.

PRESIDENT OBAMA has made progress on the first need. During the past three years, more than $1.5 trillion have been expended on such programs. But he has grossly failed to meet the second requirement – a tax and much reduced regulatory environment (which, of course, should be considered at all times). But he implicitly believes that existing taxes and threats of rising taxes do not deter private investment. This is tragically naïve.

Upon Obama’s election, White House followers of economist John Maynard Keynes instituted three years of stimulus spending on the grounds that “a larger deficit boosts economic growth by increasing aggregate demand.” The results have been abysmal. The explanation is clear: The temporary increase in aggregate demand provided by the stimulus is not sustainable without incentives to increase private investment.

In short, the second action, which is as important, if not more than, the first requires vigorous White House leadership, which was and continues to be sorely lacking.

THIS CRITICISM applies as well to implementing monetary policy. If supportive tax and regulatory policies for investment are not in place, a monetary policy that makes it easier for firms to borrow, by making more resources available to banks as well as rock-bottom interest rates, can hardly stimulate private investment.

Thus, Obama’s failure to provide incentives for investment not only undermines his fiscal stimulus effort, but the Bernanke-Fed policy of monetary ease as well!

Economists firmly agree that if the consumption stimulus policy is to be sustainable, it must generate private investment. However, investment opportunities must be thought of, created, and developed by imaginative innovators. To help induce such investment, government policy must provide for the development of investment incentives, for “animal spirits” to be unleashed.

OBAMA HAS not only failed to provide such an environment, he also has taken the further incentive-destroying step of threatening to raise taxes and, just as oppressive, added more regulatory choke holds on the functioning of a free market.

To explain, profits to entrepreneurs from new ventures have two features: (1) the expected profits and (2) their riskiness. Investments with high expectations and low risk are most favored. But Obama’s policies, with their aggravating punitive threats, reduce expected returns and enhance the risk of projects – thus placing a huge dampener on adopting risky investments.

And that is not all. Even some environmental protection policies have the effect of discouraging new investments. Over the past three years, investments foregone to satisfy new environmental restrictions, and threats of new ones, must amount to trillions of dollars – the recently rejected Keystone XL Project comes to mind as an alarming example of this deplorable policy.

The most effective procedure for using deficit spending to spark both private investment and job creation is by cutting both personal and corporate taxes, not by bludgeoning risk-takers with overt threats of higher taxes and costly new regulations (currently running at the rate of 1,100 pages per day.)

INSTEAD OF enacting such measures, White House pronouncements have become perverse: Threats to increase taxes to serve the emotional need of envy have become increasingly shrill, and the wholly thoughtless Dodd-Frank financial regulatory bill was enacted along with an oppressive Affordable Health Care Act – and all these needless impediments on top of an onerous Sarbanes-Oxley Act.

Some Keynesian followers believe that since the trillions of dollars spent on stimulus spending have bombed, the appropriate policy should be to double, or even triple, such spending. Such an addendum suggests that a consistent failure of stimulus spending enhances confidence in the validity of the underlying theory!

This is, indeed, strange logic: The greater the quantity of evidence against a view, the greater the confidence we should have in its reliability, or in the soundness of a new, different theory which calls for out-of-sight expenditures in hopes of bringing a recovery. Before embarking on this extravagant venture, we should demand compelling evidence of the theory’s validity. After all, isn’t “the proof of the pudding in the eating”?

The consequences of these Obama failures are tragic, not only in the short run but for the long haul. The absence of a vigorous investment stimulus policy during the past three years is unforgivable, but the complete paralysis that these failed policies promise for the next six months foreshadows a dismal year for 2013.

INCOME AND employment growth in early 2013 depends on risky investment spending undertaken today. This lack of incentives, coupled with the absence of significant current investment, marks the proverbial canary in the coal mine. Unfortunately, the die has been cast for an unpleasant forthcoming year, regardless of which political party wins the fall elections.

In sum, rather than emphasize consumption stimulus, Obama should stress investment stimulus, which requires great emphasis on investment incentives, the critical factor in a sustained recovery. Ironically, we are willing to suffer a deficit to hopefully stimulate consumption, but unwilling to incur a tax-reduction-driven deficit to stimulate private investment, which promotes sustainable consumption, increased output, increased employment and more entrepreneurs like Steve Jobs.

(The writer is a professor emeritus of financial economics from the University of Georgia. He lives in Aiken, S.C.)

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Riverman1 08/05/12 - 06:23 am
When Milton Friedman was

When Milton Friedman was shown a government make-work project and noticed the men were using shovels instead of bulldozers, he asked why. The officials told him because they could employ more people by not using dozers. Friedman suggested if that were the idea, why not have them use spoons instead of shovels?

harley_52 08/05/12 - 10:47 am
I Really Look Forward...

...to Dr. Beranek's occasional letters because he usually hits the nail on the head. This one is no exception.

He does a superb job of identifying many of the obviously unsuccessful, wrong-headed programs and policies that have been advanced through the Democrat Congress and Obama White House in the past four years and notes the lack of logic associated with them announcing their plans to continue down the same road, but he doesn't go on to identify their likely motives. That's what interests me the most at this point. Why did they do what the did and why, in the face of the evidence we have before us, would they try so hard to keep pursuing bad policies?

It's either stupidity, or it's intentionally destructive. They either can't see the damage that's been done already, or they want to do more of the same. Do they seek to "fix" our economy, or destroy it?

Personally, I can't imagine it's stupidity. I hate to say it, but the evidence abounds. All of which should make it perfectly clear to most Americans that we simply cannot sustain four more years of this (intentionally) destructive behavior.

Conservative Man
Conservative Man 08/05/12 - 02:39 pm

You're right on Harley. This is intentional. Obama has never hid his disdain for capitalism and the free markets. Even going so far as to call the private sector "the enemy" in his own book. What rational person would say that they want four more years of THIS...
Also just saw a post with a picture of Ronald Reagan with the caption "after four years this man wasn't still blaming Jimmy Carter"
It's time this Chicago thug politician and his "comrades" were sent packing.....

JohnRandolphHardisonCain 08/05/12 - 03:08 pm
Wars and "defense" spending

Wars and "defense" spending are what doom the U.S. economy. The U.S. military "defense" budget for 2012 is officially $716.3 billion, but when off budget, black programs are factored in that amount may be as high as $1.2 trillion annually. The good professor does not mention the elephant in the room. U.S. "defense" spending is higher than the combined amount spent by the next 17 countries with the highest amounts of military defense spending. The U.S. spends almost half of the total amount of the entire world's military spending. This is why we have become the world's policemen and now have a war driven economy. "Defense" contractors are running around like Chicken Little crying the sky is falling and suggesting as many as 1 million U.S. jobs could be lost if Congress follows through on the law it passed that triggers automatic sequestration of defense spending if a budget agreement is not reached. Tax cuts on the rich have not generated job growth over the last 11 years. Stimulus spending can work to bolster the economy, but it cannot save the U.S. military empire and cannot keep United States as the world's hegemonic superpower with unchallenged supremacy in every theater on earth, at sea, in the air, in space, and in cyberspace. To quote the word of the Graham Nash song "Military madness is killing my country."

harley_52 08/05/12 - 03:30 pm
Just Like The Economy...

....America's defenses are being intentionally degraded and weakened. We have chosen to end our efforts in the wars in Iraq and Afghanistan by slinking home with our tails between our legs. The words "win" and "victory" are not even in the Administration's vocabulary. We are afraid to act in any situation without the approval of our enemies and respect for our military capabilities by our enemies is decreasing day by day because of our crushing debt and the ravaging of the American military.

Don't ask me...ask the current and previous Secretaries of Defense and most of the highly respected General Officers who are willing to comment on the issue.

Chip 'TheDixieDove' Shirley
Chip 'TheDixieDove' Shirley 08/09/12 - 03:40 pm
More Rightwing Disinformation Here...

Right-Radio is brainwashing a lot of good people...here are some of my favorites...It's like shooting fish in a barrel!
5 GOP Tax Myths Debunked-
1-Why Shouldn't We All Pay The Same Rate? ANSWERED
2-Lower Tax Rates Bring in More Revenue-Not Really...
3-Did WWII End Great Depression? Yes and NO.
4-Corporations Don't Pay Taxes (they pass them on). Debunked:
5-What is My 'Fair Share' of Taxation? Good question!
1-Why Shouldn't We All Pay The Same Rate?
Well, we could reinvent the wheel while we're at it. Long before there was any federal income tax or payroll tax there was a thing called tariffs. These tariffs were imposed by the Federal and State governments on goods being imported and exported in the US. Tariffs were paid 100% by the richest and most wealthy early American businessmen and if not glad to do it, THEY DID IT. And they built this country. Roads, Ports, Armies, Buildings, Our Capitol. God bless'em. And the last line of the Declaration of Independence reads..."And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor."
The Dixie Dove-

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