From a political standpoint it makes little difference whether the trillions of dollars in "stimulus" spending and big-business bailouts approved by Washington in the past year have a significant effect on the economy.
When the economy starts growing again and creating jobs, as it will eventually, the White House will claim credit. That’s politics.
Even now the White House is claiming that stimulus spending created or "saved" as many as 1.1 million jobs and added 2.3% to the U.S. gross domestic product (GDP). By these measures, with another $40 trillion to $50 trillion in stimulus spending, we might double America’s $14 trillion GDP.
Depression, War, and C...
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Many are arguing that even more government spending is needed. The same arguments were made repeatedly during the Great Depression, and to this day many otherwise intelligent people refuse to recognize that the New Deal recovery program failed.
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No serious student of the Depression denies that a partial recovery took place between 1933 and 1937. Yet, just because Washington had unleashed a torrent of spending doesn’t mean that the government’s spending caused the expansion.
Even today, supporters of the New Deal recovery program claim it would have been more successful if the government had poured more money into it. The Roosevelt administration, they complain, was too timid, too obsessed with outmoded ideas about balancing the budget. Indeed, some still argue that Keynesian stimulus spending didn’t fail during the New Deal because it was never really tried.
In truth, however, the government did try to spend us out of the Depression, as it has tried to spend us out of downturns several times since. But careful analysis shows that hyperactive government policies complicate and prolong recovery, rather than trigger it.
After an economic bust, bad investments must be liquidated, so salvageable assets can be reallocated to their most valuable uses. If the government props up failed endeavors through bailouts and other programs, necessary readjustments of the economy’s capital structure are slowed or halted, and the toxic mistakes of the past become locked in place, obstructing recovery and hindering the creation of future wealth. The New Deal recovery efforts had exactly these effects, as do current government policies.
