Archive for August 28th, 2010

Stimulus Spenders and Their Silly Excuses                                         

This past week the government announced that existing home sales plunged 27.2 percent in July while new home sales were down 12.4 percent.  The numbers surprised most “mainstream” economists who expected more modest losses.  Of course, with the housing market still in shambles the value of homes is expected to drop further than the $6 trillion already lost by American homeowners.  This development coupled with continuing high unemployment and low consumer confidence is making many economists predict we are headed for a double-dip recession.

Now, naturally, proponents of the government’s failed stimulus policies have their excuses for why it didn’t work all lined up.  They are not even waiting for the double-dip to officially hit.  They are already claiming that the stimulus wasn’t spent on the right things and was simply “too small” to actually make any difference in “stimulating” the economy.

Here are the facts.  First to address the issue of sinking home sales, no one should be surprised by the numbers.  Home sales are way down for several reasons.  First of all, Obama’s first-time home buyer’s tax credit expired in April.  Folks are now waiting to see if Congress will enact a new credit before they buy.  Second, all the signs are there that housing prices will continue to drop, so why rush into purchasing a property that in a few months might be gotten at an additional discount?  Lastly, given the number of people in America who are unemployed, underemployed, and just downright broke it is no wonder that a huge expense like homeownership is not high on many people’s minds.

So the massive drop in home sales in July should not be surprising.  Anyone who understands human behavior and even the most basic fundamentals of economics knows the president’s housing stimulus program was doomed to failure.  During the time it was effective there was an increase in home sales and a leveling off of home prices, but once the program ended the bottom fell out.  No lasting growth ensued. Additionally, many first time buyers who took advantage of the tax credit used it for a down payment.  Essentially, the government was once again encouraging folks to buy houses who didn’t have the ability to save for a down payment.  This probably represents a misallocation of scarce resources and we can expect to see many of these homebuyers on a list of foreclosures in the future.

But, the president’s homebuyer tax credit is just a small part of the overall massive stimulus Washington has injected into the economy since 2008.  The entire stimulus “invested” by the feds has had a similar effect on the whole economy.  It stabilized things for a while and then wore off.  Because economic priorities are determined by politics and not the free market, we are left with a whole lot of mal-investments and possibly new bubbles.  So when stimulus proponents say the money was not spent on the right things they are technically correct.  After all, stimulus money has been spent on things like converting an abandoned train station into a museum, the development of interactive dance software, new windows for a visitor’s center that closed 3 years ago, and a study to determine the effects of cocaine on monkeys.   If these expenditures are not mal-investments, I don’t know what is.

But this is one reason why government stimuli never work.   Bureaucrats and elected officials don’t operate in a world of profit motives, competition, and the consequences of failure.  Ultimately, the allocation of taxpayer funds is doled out based on what they think is needed and to feather their own nests with the folks back home.  This is obvious given the aforementioned stimulus expenditures.

Besides the stimulus wasn’t spent on the right things argument, proponents of the policy are also saying the government’s effort was not big enough thus rationalizing its failure.  They always only point to the president’s $850 billion program passed by Congress shortly after he took office.  But, there is a lot more that has been “invested” in the economy since the depression began.  Federal spending has included everything from the Troubled Asset Relief Program (TARP) to Cash for Clunkers to GSE mortgage-backed securities purchases by the Fed.  The total of all federal stimulus spending as of December 2009, exceeded $3 trillion!  This represents more than 20 percent of annual gross domestic product.  $3 trillion actually spent and all we have to show for it is sustained high unemployment, sinking home sales, low consumer confidence, foreclosures through the roof, food stamp expenditures at all time highs, and a looming sovereign debt crisis.  The problem is not that we haven’t spent enough.  The problem is that we spent the money in the first place.

At the end of the day, government spending, quantitative easing or whatever the political establishment wants to call it simply doesn’t work.  As economist Robert P. Murphy has written we have a great comparison between the depression of 1920-1921 and the Great Depression of the 1930s to prove this point.  In the former, government cut its budget and the Fed raised interest rates.  The crisis was over within two years.  In the latter, Hoover increased government spending and the Fed slashed rates to all time lows at the time.  The result was the beginning of 15 years of economic misery.  Given the amount we have spent this time, get ready for a long rocky economic ride. 

Article first published as Stimulus Spenders and Their Silly Excuses on Blogcritics.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina

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