TCS Daily

Keynesian Spending Has Zilch Effect on Recovery

By Larry Kudlow - May 4, 2010 12:00 AM

Stubbornness is a bad trait in politics and policy, one that will be punished at the polls this November.

The Obama administration continues to argue that its massive federal-spending campaign is essential to economic recovery. Yet the latest GDP report from the U.S. Department of Commerce shows that the 3.2 percent first-quarter economic growth rate got no help from government spending.

In fact, combined federal, state, and local spending actually fell 1.8 percent. What's more, over the last three quarters of a mild V-shaped recovery, with an average quarterly rebound of 3.7 percent, government spending actually exerted a small net drag (-0.03%) on growth.

I guess it's time to ask our Keynesian friends in and out of government what exactly happened to those vaunted multiplier effects they so loudly proclaimed. So far, there is zilch effect.

Turns out that all those entitlement transfers of income borrowed and taxed from Peter to pay Paul have made no direct contribution to the nation's production of goods and services. This, however, comes after $318 billion of spending through April 23, according to the website

Pretty expensive fiscal habit, wouldn't you say? But for what?

And who can blame taxpayers for saying, "Show me the money that was supposed to generate growth." In the winter quarter, consumer spending increased 3.6 percent and business equipment investment rose 13.4 percent, all while inventories were rebuilt by $31 billion. But the G in the GDP equation C+I+G+(X-M) actually dropped. (That is, consumption + investment + government spending + the net exports/imports trade.) That's right, dropped.

That failed G for federal, state, and local spending may cost untold trillions of dollars of future tax and debt burdens. Rather than stimulate growth, this will depress it in the years to come -- unless we do something about it.

How about stopping the madness right now? How about "de-stimulating" the remaining $500 billion of unspent Keynesianism?

And how about some truth-telling about the big pick-up in business profits that is really behind the recovery -- profits that have fueled a stock market boom which has created trillions of dollars of new wealth through capital gains that are being spent and invested in the private sector?

The only temporarily effective government-stimulus effect is coming from the Fed's free-money, zero-interest-rate policy. And here, too, is stubbornness. For the economic emergency has long passed; the recession ended in last year's second quarter. Yet the Fed -- now controlled by Obama doves -- stubbornly persists in maintaining an emergency pump-priming policy that surely will drive up inflation in the years ahead.

This article first appeared on Kudlow's Money Politic$.


wow! multiplier's are bogus! Someone tell Roy.

Saving government jobs
Obama wasn't trying to save or create productive private sector jobs with his stimulous. Government jobs were all it really created. Greece's economic and social model seems to be what the community organizer has in mind.

An interesting admission
Isn't this unusual-- the author apparently wants to convince us that excess government spending sends is down the wrong road. Yet right at the beginning he admits that "the latest GDP report from the U.S. Department of Commerce shows that the 3.2 percent first-quarter economic growth rate got no help from government spending. In fact, combined federal, state, and local spending actually fell 1.8 percent."

So in fact government spending has FALLEN? And in fact we've been seeing no Keynesian stimulus? Then no wonder there's been no job-filled recovery. Correct?

He goes on: "What's more, over the last three quarters of a mild V-shaped recovery, with an average quarterly rebound of 3.7 percent, government spending actually exerted a small net drag (-0.03%) on growth."

Let's see how the whole concept reads. First, no stimulating increase in government spending. Next, as an ostensible consequence, there's been a "small net drag on growth".


Show us the increase
The only problem with your equation is that Obama has created no new government jobs. The only increase has been the predictable deployment of an army of temporary census takers-- an event that occurs every ten years, regardless of who is president.

No...once again, you obfuscate
Yes, exactly...because in order for the government to spend money, it needs to take it out of the private economy.

But that isn't the real crippling issue and you know it. The real issue is that once again Keynes was proven a fraud...and the 'money multiplier' nonsense equally so.

How many postings on TCS over the years have you glorified the precious (but totally bogus) money 'multiplier', Roy?

That's the real issue here with my post.

Shooting down more of Roy's denials of reality:

"The Obama administration projects the number of employees on the government payroll will grow to 2.15 million this year, reportedly making it the largest federal workforce in modern history and fueling criticism over the size of government.

The Washington Times reported Wednesday that the bulk of the increase is on the civilian side, which is expected to grow by 153,000 workers in 2010.

The expansion means the workforce will top 2 million for the first time since President Clinton declared that "the era of big government is over," according to the newspaper.

The expansion comes even as Obama calls for cutting the deficit and imposing a three-year freeze on some non-security spending."

But not all of it was federal. A lot went to the states as 'stimulus' and they created more government employees or avoided the necessary reduction-in-force thereof.

The multiplier effect
We can quibble about whether or not the multiplier effect really works. It seems obvious to me that when you throw money out onto the street, let it work its way through the mercantile economy and then come to rest back in the US Treasury, it has done some useful work along the way. To you it doesn't.

But the substance of my comment was that it is unfair to expect that a multiplier effect can be evidenced in our economy, this year, when in fact government spending has gone DOWN. Does this obvious fact not get through to you?

Government spending has been reduced-- at least according to our author here. The economy has then slowed. Thus the obverse of the multiplier effect theory would seem to have been validated. Perhaps they should try reversing their curious approach to getting our economy back on track. And start spending some money wisely.

Counting federal employees
Hmmm-- you say the federal payroll is slated to grow to 2.15 million by the end of this year?

Let's compare that to the OPM's official tally of "federal government" employees. And let's restrict them to just those people employed by the executive branch. No postal employees, no military, no congressional staff and no judiciary. Okay?

Here's what I find. Since 1966 there have never been fewer than 2.5 million federal employees, counting only those within the executive branch. In 2008, the last year before Obama took office, there were 2,692,000 such federal employees. So whatever idiot source you took these numbers from would appear to be badly off base.

In the states, everyone (but you, apparently) knows full well that there's a lot of belt tightening going on. They aren't hiring new folks anywhere that I know of. Maybe in Montana or Wyoming, where they're not drowning in red ink. But there's a freeze on most everywhere else.

I assume you readily make such dramatic statements ("A lot went to the states as 'stimulus' and they created more government employees" etc) purely for effect and without regard for the truth. Prove me wrong. Cite something further about federal and state governments expanding their payrolls this year.

Moving on. Your own source, the one you cite, states that "Mr. Obama says the civilian work force will drop by 80,000 next year, mostly because of a reduction in U.S. census workers added in 2010 but then dropped in 2011 after the national population count is finished. That still leaves 1.35 million civilian federal employees on the payroll in 2011.

So he's shrunk Big Government from 2,774,000 during his first year in office (2009), down to a mere 1,350,000 employees by 2011? I don't believe it.

But of course, we read it in the Washington Times.

The largest drop
Looking more closely at the official record,

I se where the steepest decline in the number of federal nonmilitary, nonjudicial, noncongressional employees was from 1991 (3,048,000 employees) to 2002 (2,630,000 employees). Gosh, who was president back then? Whoever they were, they must have really been on the ball.

What was the phrase Al Gore used? Something about shrinking big government? Oh yes-- he was "reinventing government". And reduced the federal payroll by a half million people, allegedly to the lowest number seen since the Eisenhower administration.

Ronald Reagan, on the other hand, came into office with 2,806,000 federal employees-- and left office with a workforce of 3,054,000. That would make him the worst of our recent presidents-- at least using this one parameter of presumptive excellence.

Check my arithmetic. Something must be wrong, right?

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