Stimulus & TARP 1.5 Trillion Wasted : Keynes IS Wrong!

If we pay any attention at all to history, especially during the 'great depression' and after, we find that the Keynesian theory, huge government spending to spur economic recovery, failed. And now that Obama has doubled down on these failed policies to supposededly turn the country back to prosperity, which in fact has turned out to be more failed policy, we see he has failed just as FDR failed 65 years ago. What went wrong?

The problem that we have here is our government is using this Keynesian theory to have access to trillions of dollars that they can use to cement their grip on political power. By funneling billions to groups that are sympathetic to the agenda of those in power, such as unions of all kinds and large corporations looking for hand outs, much of the money eventually comes back to the power brokers in the form of campaign contributions.

This can be called 'money laundering' of tax dollars and has been used for decades. It's only now that the 'light' of failing state and federal governments that is beginning to shine on this form of getting contributions for elections and is getting results. Witness the budget reform in Wisconsin that stopped the laundering which has balanced the budget and saved thousands of jobs.


Where Keynes Went Wrong
Source: Charles Wolf, Jr. "Where Keynes Went Wrong," Weekly Standard, November 7, 2011.

It is generally recognized that the conceptual underpinnings for so-called stimulus programs lie in the theory developed by John Maynard Keynes in the 1930s. And though his theories have been broadly developed throughout the past century and touted by leading economists as revolutionary, the poor performance of policies based on his theories in resolving the recent recession should give cause for reassessment. In doing so, it is first important to look to the real costs of the recent stimulus package, says Charles Wolf, Jr., a senior research fellow at the Hoover Institution.

In addition to the $787 billion in "stimulus" money, the Troubled Asset Relief Program funding ($700 billion), bailout funds for the auto industry ($17 billion), the extension of unemployment benefits ($34 billion), and the "cash for clunkers" program ($3 billion) bring the total cost of the package to $1.5 trillion.

Between the end of the second quarter of 2009 and the end of the second quarter of 2011, nearly all the stimulus funding was disbursed with the result that gross domestic product (GDP) increased from $12.6 trillion (in 2005 prices) to $13.3 trillion.

In that same period, gross private consumption rose by $400 billion and gross private (nonresidential) fixed investment rose by $155 billion; employment decreased by 581,000.

These results paint a negative picture of the impacts of the stimulus package's effects in the American economy. The fact that $1.5 trillion in spending resulted in a GDP increase of a mere $700 billion suggests that American taxpayers received less than 50 cents on the dollar of investment. This seems to contradict the results predicted by Keynes, who predicted that increases in aggregate demand should realign the economy into full-employment equilibrium and lift it out of the recession.

In looking to Keynes' theories for some explanation of the package's meager results, it is prudent to reexamine the assumptions his model made. In so doing, one of his assumptions, that increases in government spending would not adversely affect investment or consumption, stands out as overly optimistic. It is possible that the borrowing necessary to finance the stimulus package sent the message to consumers that they should save rather than spend. Similarly, it is possible that many investment opportunities were ignored by potential investors who did not want to inject cash into the heavily regulated American market.

These adverse effects perhaps explain the poor results of the stimulus package, and should remind policymakers to consider the assumptions upon which Keynes' theories rely.