Wednesday, June 3, 2009

Recall the Stimulus!

The American Recovery and Reinvestment Act is bloated, wasteful, and unnecessary, and it should be recalled by an angry population. It was passed in early February before any person in Congress could read it, much less debate its contents. It authorized spending $787 billion dollars on projects that were deemed essential, at the time, to avoid an economic catastrophe.

Three months later, as of May 22nd, our government reports that only $37 billion of the money has been spent, less than 5% of the total. Meanwhile, signs of recovery are appearing everywhere. Job losses have stopped rising, and corporate layoffs have fallen by half. Commodity prices are up across the board. Energy prices are up 70%. Global trade is reviving. Global equity markets are up by a third. Credit spreads have fallen significantly. The housing market appears to have hit bottom in the most distressed areas, and home sales are surging. Bond yields have soared as deflation fears have been erased. Car sales are turning up.

The stimulus spending was never designed to take immediate effect, yet it was sold to the public and to Congress as an emergency measure so critical to avoiding an economic depression and financial makret meltdown that there was no time to debate its contents. As we now know, it was most likely unnecessary, since the economy seems well on its way to recovery with virtually zero help from stimulus spending.

We also know that the spending contained in the bill, in combination with other rescue and bailout measures, will cause the federal deficit, as a percent of GDP, to soar to levels not seen since WW II. The deficit is likely to approach $2 trillion this year, and seems likely to exceed $1 trillion per year for the foreseeable future. Already the world is beginning to worry about the enormous financing needs that are piling up. Gigantic deficits today will only make solutions to other looming deficits (e.g., social security, Medicare) that much more difficult to handle.

Many of the programs in the bill are likely to continue forever, resulting in what could well be a 25% permanent increase in the size of the federal government. That in turn will require an equally large and extremely burdensome increase in tax burdens on our economy. The prospect of significantly higher tax burdens is already depressing our financial market.

Let's recall the Stimulus Bill! We don't need it, and real truth is that we would be much better off without it. Our government and our tax burdens need to shrink, not expand.


Mark A. Sadowski said...

The $37 billion represents about 1% of the GDP. The green shoots we are seeing now are indubitably due to the American Recovery and Reinvestment Act. That its effects have been so strong and occurred so soon are exciting. It implies that the fiscal multiplier is much larger than anyone realized. Martin Wolf wrote an article on this very subject today:

Bill said...

That is total nonsense. The $37 billion is a drop in the bucket compared with the tsunami of cash emanating from the Fed. The latter, combined with the natural tendency of the economy to right itself, is the real cause of our incipient recovery.

Scott Grannis said...

Maybe I failed to make myself clear in the post. My point is that the amount spent so far is so small that it can't possibly have helped the economy recover, yet the economy is recovering. Ergo, we don't need the rest of the stimulus.

Fed ease has probably done a lot more than the measly amount of stimulus could possibly have done.

Brian H said...

The real issue is the 25% permanent increase in the size of the federal government. That's what this is all about, and unless we suddenly have an election do-over, I'm afraid our political class we be a bit slow to hear our complaints.

Sorry to be pessimistic, but I'm mid-forties now and its getting to me. And what's with Conan O'Brien getting the Tonight Show? Too much change...

seekingtraceevidence said...

Scott your commentary has been on the bullseye since you began. I urged Kudlow to have you on his program as he knows and respects your work.
This piece should be an editorial in the WSJ.

Jon S. said...

Scott -- I've been absent from commenting for a while but are still reading your blog most days. And you are not being unclear at all. Mark, as usual, is either deliberately obtuse or merely a partisan hack for Obanomics -- or both.

Despite some fancy footwork and disparaging comments about monetary theorists, Martin Wolf (Mark's citation) ultimately agrees that the Fed needs to tighten at some point -- and sharply! So much for the small to zero impact of monetary policy, eh?

That we've seen so much improvement across the board, despite the coming horrors and despite virtually no stimulus spending, demonstrates the folly of the first few months of Bambi's presidency. No help of any sort for the economy re spending, but a downpayment on years of permanently growing government and ruinous rates of taxation.

CDLIC said...


Excellent and very informative post! And I agree with Seekingtraceevidence: Kudlow and the WSJ should be sharing your points of view -- Most Definitely!

The following is off-topic. I know you are a fan of Ayn Rand, thus, the following article by Amity Shlaes in the June 3, site titled 'Rand’s Atlas Is Shrugging With a Growing Load: Amity Shlaes. Go to


Scott Grannis said...

Thanks for the compliments. I trust that Larry is still reading my posts. You're not likely to be seeing me on his program, though. I'm happy to be generating stuff that can be used by others.

Scott Grannis said...

CDLIC: Thanks for the link to Amity's article. Good ideas never die.

Scott Grannis said...

I note that Larry Kudlow mentioned this post in his blog today, as well as others who are calling for either a rollback or cancellation of the remaining stimulus spending.

W.E. Heasley said...

Mr. Grannis:

Simultaneously deploying Quantitative Easing and Keynesian Deficit Spending in an environment of high current debt is a dicey proposition at best. One must keep in mind that both QE and Keynesian Deficit Spending were theories developed in an environment of zero of low government debt.

Recalling the social engineering plan aka stimulus plan is a brilliant idea. Just like the wrong e-mail being recalled by a sender, recall the wrong stimulus plan.

One item that is missing, that also occurred during the Great Depression, are incentives for Private Capital Formation. No long term private sector job creation is going to occur without incentives for Private Capital Formation.

Scott Grannis said...

That is an excellent point. In prior posts I complained (to no avail of course) that the stimulus plan had no provisions that would increase the incentives for taking risk, working harder, and investing. In other words, there were no cuts in marginal tax rates for risk-takers. As such, the stimulus plan would provide little, if any, real stimulus to the economy.

I think that is equivalent to your point. In order to grow, an economy needs capital, and the best way to increase capital is to increase the after-tax rewards to putting capital at risk.