Why the Stimulus Failed
History shows that government spending and social-engineering programs don’t spur growth.



Ask most Americans about the big-spending government policies of the last few years, and they will tell you the programs have failed. In a February 2012 poll from the nonpartisan Pew Research Center, 66 percent of Americans said the federal government is having a negative impact on the way things are going in this country (versus 22 percent who say the impact is positive). A majority disapproves of the president’s 2009 stimulus, and according to a 2010 CNN poll, about three-quarters of Americans believe the money was mostly wasted.

Of course, the measure of economic success is not public opinion, but the factual effects of policy. The emerging evidence on various spending programs shows that Americans’ intuition is correct: The Keynesian deficit spending has been poorly designed and badly executed, and it has had little benefit for our economy.

As just one example, consider the infamous “Cash for Clunkers” program, the $3 billion federal plan that allowed people to trade in an old car in exchange for about $4,000 off the purchase of a new one. The administration argued it would stimulate the U.S. economy and improve the environment. Critics saw it as a way for the government to prop up the car companies it had recently bailed out. But whatever the motivation, the program was a bust. Economists at the think tank Resources for the Future have found in a new study that the program did not stimulate the economy, and that 45 percent of the money went to people who would have bought a new car anyway. In other words, the administration could have cut out the overhead and simply handed out $1.35 billion to random people on the street.

The ineffectiveness of this program is illustrated by rigorous economic analysis. But Americans know in their hearts that they could drop the needle almost anywhere on Obama’s Big Government Spending Album and get the same basic results: lots of spending with little to show for it.

The reason is straightforward. As many economists have found, most government spending has relatively little effect on the economy, and any effects are generally short-lived. For example, Harvard economist Alberto Alesina and his colleagues show in a new National Bureau for Economic Research study across many countries that government spending has little connection to GDP growth, making spending cuts ideal for balancing budgets without provoking a recession — but this also means that spending does little to stimulate economies. Alesina finds, however, that tax changes have large macroeconomic effects; that is, tax increases reliably depress the economy.