Last year, White House econ omists claimed that the $862 billion stimulus would create 3.3 million jobs. Since then, the nation has lost more than 3 million jobs.
That’s a 6.3 million jobs gap. By the White House’s own standards, the stimulus failed.
So President Obama has shifted his argument. Sure, the economy lost jobs, he concedes — but without the stimulus, it would’ve lost nearly 2 million more jobs.
This is nothing but faith-based economics. The White House estimate of “saving” nearly 2 million jobs is based not on observations of the economy’s recent performance — but merely on the administration’s unshakable belief that deficit spending must create jobs and growth.
Specifically, the White House staff’s “proof” that the stimulus created jobs is an economic model that they programmed to assume that stimulus spending automatically creates jobs. How’s that for circular logic?
In other words, even if we’d lost 20 million jobs, their models would basically crank out the conclusion that we’d have lost 22 million without the stimulus.
Worse, the central tenet of this “faith” is false: The premise that stimulus spending must create jobs just isn’t true.
The stimulus theory is that government spending injects new dollars into the economy, thereby raising demand and spurring economic growth. That makes some sense — if you don’t ask where the government got the money.
Congress doesn’t have a vault of cash waiting to be distributed. Every dollar it “injects” into the economy must first be taxed or borrowed out of the economy. No new income, and therefore no new demand, is created: It’s merely redistributed from one group of people to another.
Removing water from one end of a swimming pool and pouring it in the other won’t raise the overall water level, no matter how large the bucket. It’s the same with redistributing dollars from one part of the economy to another.
The White House says the $300 billion spent from the stimulus thus far has financed as many as 2 million jobs. Even if we pretend that that’s true, the private sector was left with $300 billion less to spend, which — by the same logic — must lose the same number of jobs, leaving a net jobs impact of zero.
Some will insist that this $300 billion represents new demand because it was transferred from savers to spenders. They’re wrong.
First, this assumes every dollar lent to Washington for this spending would have otherwise been saved. Yet anyone who has observed America’s miniscule savings rate understands the private sector would have spent the vast majority of this $300 billion, had Washington not taken the cash instead.
Second, savings don’t fall out of the economy: They are invested or deposited in banks — which then lend them out to others to spend. Even when recession-weary banks hesitate to loan money, they invest it in Treasury bills instead. They don’t hoard customer deposits in massive basement vaults. One person’s savings quickly finances another person’s spending.
So all $300 billion would’ve otherwise been spent by the private sector. The government stimulus spending merely displaced private spending, dollar for dollar.
(Even money borrowed from foreigners is no free lunch. Before China can lend America dollars, it must acquire them by running a trade surplus — which is a trade deficit for America. America’s increased trade deficit exactly offsets the dollars borrowed, leaving a net impact of zero.)
Yes, the president can point to factories and people put to work with government funds. What we don’t see are the jobs that would have been created (or factories used) elsewhere in the economy with those same dollars had Washington not taken them.
If governments could spend their way to economic growth, then Greece would be booming. Instead, it’s in free-fall. And if budget deficits stimulated growth, then last year’s $1.4 trillion budget deficit would have overheated the economy. It clearly did not.
But the White House has no use for this evidence that the stimulus failed. It has its computer models — and it’s not letting economic reality get in the way.
Brian M. Riedl is a fellow in federal budgetary affairs at The Heritage Foundation (heritage.org).