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The Worst Piece Of Legislation Since The 1930's

A very informative interview in The Atlantic has been making the rounds in the bologosphere. Robert Barro, a Harvard economist and former champion of Keynesian economics, has bluntly declared that the spending bill served up by Speaker Pelosi is a historically horrible piece of legislation:

This is probably the worst bill that has been put forward since the 1930s. I don't know what to say. I mean it's wasting a tremendous amount of money. It has some simplistic theory that I don't think will work, so I don't think the expenditure stuff is going to have the intended effect. I don't think it will expand the economy. And the tax cutting isn't really geared toward incentives. It's not really geared to lowering tax rates; it's more along the lines of throwing money at people. On both sides I think it's garbage. So in terms of balance between the two it doesn't really matter that much.

Barro's recent article in the Wall Street Journal has stirred up controversy owing to its refreshingly straightforward critique of the Obama spending plan. In short, Barro notes that it is a liberal fiction that that the stimulus plan will result in spending greater than the actual amount of the "stimulus" ( the multiplier effect" or spending that will result in a multiple greater than 1.0):

"The explanation for this magic is that idle resources -- unemployed labor and capital -- are put to work to produce the added goods and services. If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the added government spending is a good idea even if the bridge goes to nowhere, or if public employees are just filling useless holes. Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases."

The Obama team makes the claim that the spending bill will result in a multiplier of around 1.5 and Barro debunks this canard by explaining that:

"I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8 (430/540). The other way to put this is that the war lowered components of GDP aside from military purchases. The main declines were in private investment, nonmilitary parts of government purchases, and net exports -- personal consumer expenditure changed little. Wartime production siphoned off resources from other economic uses -- there was a dampener, rather than a multiplier.

We can consider similarly three other U.S. wartime experiences -- World War I, the Korean War, and the Vietnam War -- although the magnitudes of the added defense expenditures were much smaller in comparison to GDP. Combining the evidence with that of World War II (which gets a lot of the weight because the added government spending is so large in that case) yields an overall estimate of the multiplier of 0.8 -- the same value as before. (These estimates were published last year in my book, "Macroeconomics, a Modern Approach.")"

Predictably, the extreme Keynesian apologists like Paul Krugman think the one trillion plus spending proposal is not enough and have asserted that the proposal is doomed to failure as a result of the absurd notion that liberal have been too timid in their waste of taxpayer dollars.

A far more effective method to increase private saving and consumption is obviously to lower taxes which would have the effect of putting more money in the taxpayer's pocket immediately and provide the highest marginal rate taxpayers an incentive to work more and be more productive. This is how recessions are ended and recent history is replete with examples of this policy effectiveness.

Unfortunately, liberal Democrats (and liberal Republicans) won't divorce themselves from the class warfare mentality that blinds them to the reality that in order to end a recession small business owners (re: the wealthy, in their world view) must keep more of their own money which can be reinvested in their businesses. Instead, the liberal herd rushes off the cliff (carrying with it the domestic economy) in a panic to appease their constituents and cement their hold on power. The Pelosi spending bill is the economic policy equivalent of rabid Jacobinism, the left gone wild in an unprecedented domestic spending frenzy that will have consequences for generations to come. As Barro noted, it's quite possibly the worst piece of legislation since the 1930's.


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Comments (14)

Hugh, you may be correct in... (Below threshold)

Hugh, you may be correct in saying this is a bad bill. NOBODY knows for sure if it will work or not. But one thing the majority of American's realize is that tax cuts for the rich do NOT create jobs (trickle down) or we would not be in this position of massive unemployment.

Argue all you want about the tax cuts, the proof is before your eyes. This country needs jobs, and the people need them now, not next year, next election, etc.

Republicans are still working for the lobbyists who want only tax cuts for their rich clients. Everyone wants the situation to get better so all of our politicians better stop throwing temper tantrums over losing the election, and do what is right for America.

Lay the blame where it belongs. "POLICIES AND CORRUPTION OF THE BUSH ADM." They lied about the unemployment figures every month since the 2001 tax cuts. While unemployment was rising he was bragging about the jobs being created by the tax cuts and some idiots believed him. Meanwhile if Republicans want to be useful, they should start investigating on their own what prevents the Economy from restarting.

$10,000 invested under only Republican presidents in the S&P would have only returned $1,733. That same $10,000 invested under only Democratic presidents would have returned $290,671. Liberal Agenda of Debt creation? Who the hell spent the LAST trillion KILLING People? The Liberals? What the hell are you smoking? This isn't about bigger government. It's about saving the asses of everyone who has been conned into believing the free market WORKS.

I think it's time for all Americans to start pulling together, and if this bill does fail to start the economy growing, don't point fingers at anyone, just try and find a solution, as past solutions haven't worked, have they?

Allen, your argument is so ... (Below threshold)

Allen, your argument is so disconnected from reality that there's no point in answering it.

NOBODY knows for s... (Below threshold)
NOBODY knows for sure if it will work or not.

So, let me get this straight, Allen: we are supposed to spend over a trillion dollars on something we do not even know if will work? That makes sense how, exactly?

And one of the primary forces of this recession was Democrat policies regarding housing (which, in all fairness, elected Republicans did not expose, fix, and/or block strongly enough.)

I find it interesting that the recession started about the same point that Obama was taking the lead as the Dem presidential candidate during the primaries. Coincidence?

This bill is not about crea... (Below threshold)

This bill is not about creating jobs, or saving jobs, or even stuffing the pocket of democrat fat cats with money for beer and skittles. It is about entrenching socialism (and worse) into the economic and social fabric of America through the funding of leftist pressure groups like ACORN, SEIU, and various open borders types. If this passes, expect all gov't employees to be required to join SEIU, all voter registration to be controlled by ACORN, all illegals treated like VIPs. Obama is trying to take control of the 2010 census away from the Commerce secretary, and put Rahm Emanuel in charge. If this happens, expect the entire country to be redistricted into vast swaths of immigrant dem voters, controlled by voter fraud machine ACORN. His strings are being pulled to perfection by the Soros/Ayers puppet masters.

I would disagree with the t... (Below threshold)

I would disagree with the title of this article. Let's try, "Worst Piece of Legislation EVER". With everything we know about what has worked in the past and to ignore it is incomprehensible. This is like the Twilight Zone. Truly La La Land thinking with Obamalala trying to convince the country, and the world for that matter, that this will work when it has never worked before.

Clearly the author doesn't ... (Below threshold)

Clearly the author doesn't know what he's talking about. The bill gives vast sums to democrat supporters, contributors and election fraud specialists while guaranteeing the left a virtual lifetime of abusing power, the Nation and the American people. So for San Fran Nan and her cohorts, this is the most successful and lucrative bill ever imagined!

This bill will help the gov... (Below threshold)

This bill will help the government, unions and the poor. How many government workers have been laid off? Hmmmm Aren't alot of union run factories in big trouble because of outrageous salaries, benefits and retirement funds for basically unskilled people? Hmmmmm Hasn't a great deal of money been spent to eliminate poverty for, oh say, the last 40 years with no results? Hmmmm This whole thing is a big pork package to buy votes and pay back political favors. Welcome to Chicago.

Kathy -The cumulat... (Below threshold)

Kathy -

The cumulative total on the War on Poverty is over $3 trillion - and the numbers are essentially unchanged since the 1960s.

But hey, just because throwing money down a rathole hasn't done any good in the past doesn't mean it won't be doing good in the future. All it means is we haven't thrown enough money away!

It's insane to spend this k... (Below threshold)

It's insane to spend this kind of money when we don't even know if it will work, especially when our economy will pull out of a recession on its own anyway.

Allen, do you see black hel... (Below threshold)

Allen, do you see black helicopters and do you wear a tin foil hat? ww

To me it seems that the sta... (Below threshold)

To me it seems that the statement that the statement that government stimulus will have a stimulating effect of more than one is in violation of the laws of Thermodynamics. You can't get more energy out of a systmen than you had put into it.
Keynsian Economics is like using electricty from one battery to run an electric motor and using that motor to run a turbine to create more electricty which would then be put back into the same battery. Because of ineffeciencies in the process the battery will eventually run dead as all of its energy would have been used to create less energy. That's thermodynamics.
What the Big O is telling us with this stimulus package is that the process will be operating at over one hundred percent efficiency and at the end of the process the battery will end up with more energy stored in it than it had before. It is not possible, not in physics and not in economics.
I challenge any proponents of Keynsian theory to tell me why California is such a mess. Why isn't California with its high taxes and high regulation leaving the rest of the country in the dust of recession? Why does California have unemployement higher than the national average and a 40 Billion dollar defecit?

Allen - "They lied abou... (Below threshold)

Allen - "They lied about the unemployment figures every month since the 2001 tax cuts."

Really? Well, then you obviously can prove that with the "real" figures and the source.


"Meanwhile if Republicans want to be useful, they should start investigating on their own what prevents the Economy from restarting."

OK, admittedly I'm friggin' lazy and busy chasing unicorns, so... clue me in.

If for a moment, we assume ... (Below threshold)
Good Captain:

If for a moment, we assume that the Obama stimulus plan is a "classic Keynesian-type" stimulus and compare it to an alternative plan of broad tax cuts, what, if any, key differences might we expect from the two approaches?

A properly structured Keynesian stimulus plan should (per the economic text books) promote consumption in the targerted area(s) at some fractional level of the money being applied. Depending on multiple factors, including governmental inefficiencies, some discount to the total amount spent would be intially expected. A properly targeted plan hopes to promote secondary demand thereby increasing the nation's GDP. This is essentially what a Keynsian hopes for. In effect targeted government spending is the prime economic engine. Absent further stimulus and/or a re-surgence in the economy, the ecnomy swallows the stimulus much like a large snake swallows its prey. It swells while digesting the target and then returns (more or less) to its prior stature.

The supply-side appraoch (tax cuts) approaches the problem indirectly when compared to the above approach. Tax cuts are inacted to encourage 3rd parties to act in their own economic interest. Despite your disdain for them, honest reflection demonstrates they clearly work. It is this fact that gave President Bush the upper hand in gaining Congressional approval despite a Democratically controlled Senate)for his tax cuts in 2002 and 2004. They work because millions of individuals take their new increase in income and apply it in a wide variety of ways. Whether they be individual or a corporate entity, the $ or put to work through increased spending or investment. If the $ are placed in Investments or general savings, the $ will be put to work (so to speak). Because tax cuts are generally multi-year events, this stimulus re-occurs and is not just a one-time thing. Most importantly, the increased dollars placed into investments often result in value creating entities that require additional workers and which in turn increase (over time) the tax dollars available in future years. Stated differently, tax cuts, unlike government spending proves to be the more sustainable and effective option.

"Because tax cuts are ge... (Below threshold)

"Because tax cuts are generally multi-year events, this stimulus re-occurs and is not just a one-time thing."







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