Professors: Spending plan will not work

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Published: February 23,2009

John Maynard Keynes was a British economist who died more than 60 years ago, but his policies remain very much alive in the U.S. with President Obama’s signature on the American Recovery and Reinvestment Act.

Keynes advocated interventionist government policy, in which government would employ fiscal and monetary measures to stem the tide of economic recessions and depressions.

That is the exact approach the roughly $790-billion stimulus bill takes.

The most glaring problem with the bill, said Dr. Trellis Green, is a lot of the money it spends will not generate an equal return.

Green, associate professor of economics and international business at the University of Southern Mississippi, said too few programs have a multiplier of at least one.

“If you put one dollar into it, you get less than a dollar spending back,” Green said.

“The old theory that they’re going by is you increase demand by pumping government money into the economy, you prime the pump. In the best-case scenario, it might help a little bit in the short run to get you back toward full employment. There’s a low probability of that happening. Number one, most of the spending in Obama’s bill, less than 10 percent is on real infrastructure spending, with a multiplier of greater than one. Most of the spending is social programs, income transfer payments. These don’t have a multiplier greater than one, so for heaven’s sakes it’s not going to work.”

Obama and his congressional allies conjured up doomsday scenarios in pushing for the bill’s passage, sounding an alarm that without the bill, the current recession would spiral into a depression whose effects could not be reversed.

The president’s comparison of the current economy to the great depression is wildly inaccurate, said Ole Miss assistant professor of economics Dr. Andrew Young, because the U.S. labor force and job market are both much bigger then they were in the 1930s, and the unemployment rates can not match.

“Hyperbole would be a weak word” for the rhetoric surrounding the debate and eventual passage of the bill, Young said.

“(The bill) is not a good thing on two levels: It’s not a good thing in principle and it’s not a good thing in practice,” Young said.

The principle supporters of the bill used was the one that running a large deficit will stimulate a bad economy and can be made up in flush economic times with large surpluses, assuming those surpluses are put into some sort of savings or sinking fund.

Historically, Young said, that has not worked, because states ignore the need to save when there is a surplus.

“And, when we see all the aid (included in the bill) that’s being handed out to the states, one has to ask themselves, ‘What were these states doing spending out of control during these booming years?’” Young said. “In practice, the fact of the matter is a lot of it is not what we would call economic stimulus. A lot of it is massive, new types of government expenditure and, quite frankly, probably enduring additions to the role of federal government.”

Obama insists the bill will eventually create between three and four million jobs in an economy that is losing them at a pace of several hundred thousand a week.

Aside from the 10 percent of the bill’s spending designated for infrastructure, Young and Green agree that there is very little that will reduce the 7.6 percent unemployment rate the nation hit in January.

“Some economists say it doesn’t matter what you spend it on, but it does. It matters,” Green said.

“It’s going to be 2011 before any of this new spending actually hits the economy; I pray we’re out of this recession by then,” Young said.

The two are also in agreement that the likely failure of this bill will lead to its supporters pushing for another, similar measure. Green all but guaranteed it.

“You’ll see stimulus package number two,” he said.

Young said Congress has yet to develop distaste for spending hundreds of billions of public money on programs whose effectiveness is uncertain at best.

“I would have thought at one point that their potential to do that would have been limited by how unpopular these programs seem to be, but that doesn’t seem to be stopping the federal government at the moment,” Young said.

Contact MBJ staff writer Clay Chandler at clay.chandler@msbusiness.com .

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