Stimulus: Too Much, Too Late

This comes way of Carpe Diem from a post earlier this week, which received this piece from Bruce Bartlett over at Forbes. An excerpt:

The problem is that Obama was always much too optimistic about how quickly stimulus spending could have an effect. As I warned in a January column, it takes far more time for it to impact the economy than most people think. Moreover, not all government spending is necessarily stimulative, and the parts of the stimulus package that provide real stimulus are among the slowest to come online.

According to CBO Director Douglas Elmendorf, by the end of fiscal year 2009, which ends on Sept. 30, about a third of the least stimulative spending will have been spent vs. only 11% of the highly stimulative spending. Even at the end of fiscal year 2010, we will have spent only 47% of the highly stimulative spending. By the end of fiscal year 2011, more than a quarter of the stimulative spending will still remain unspent.

Some years ago, I did a study of every anti-recession program in the postwar era. I found that they invariably impacted on the economy too late to really help. There were many reasons for this. First, economists were slow to see a recession coming and often didn't see one at all until we were already well into it.

Then it took time to convince policymakers to do something and get legislation enacted. By the time a countercyclical program was signed into law, the recession was always over. Consequently, the stimulus stimulated when the economy was already on the upswing. The result was that these programs stimulated inflation more than they stimulated jobs and growth.

Many years ago John Maynard Keynes warned against using public works for stimulus for precisely this reason--they are too hard to reverse once the need for them has passed. With many economists already warning about inflation coming back in the near future, the ultimate legacy of the stimulus bill may be to make it harder to tighten fiscal policy when it will be needed.

The author further points out that no stimulus plan enacted since WWII has ever been successful because of the lags associated with recognizing the economic downturn, the time it takes to draft the legislation, and how long the package takes to go into effect. What ends up happening is that if the stimulus does have a positive impact, it only adds to an economy that has already corrected itself. If government had refrained from trying to influence the naturally occurring market forces in the first place, then we would still experience the upturn in the economy minus the huge debt we are accumulating from the stimulus.

Larry Kudlow notes:

Incidentally, the federal budget deficit update for June was horrible. Year to date the deficit broke past $1 trillion. Now, June is always a surplus month. But this year it’s a deficit month.

We are cruising toward a $2 trillion budget deficit for fiscal year 2009. Federal spending is up 23 percent against the year-ago level. Recessionary revenues are plunging; they are down 16 percent. Personal tax receipts are off 22 percent and, get this, corporate taxes are off an astounding 57 percent.

Government, just get out of the way.