When stimulus fails to stimulate

Beats him

Last week’s news that US GDP had shrunk by 0.1 percent presented some with a problem. The United States, with its apparently indefinite commitment to trillion dollar deficits, has been held up by Ed Balls among others as the Keynesian poster boy in comparison to the ‘austerity’ which, it is claimed, is ravaging Europe’s economies.

In December, John Cassidy of the New Yorker wrote: “It’s official: Austerity doesn’t work”, contrasting the growth in US GDP with the miserable stagnation of Britain’s. And here it was shrinking.

Duncan Weldon, the TUC’s resident economist, took to Twitter to explain that the “Primary reason for US GDP fall is govt spending cuts…This enhances rather than disproves case for stimulus.” Does it?

The first thing to note is that GDP is a measure of spending which is used as a proxy for measuring the much more elusive concept of economic wellbeing. As such, getting it to rise or fall is child’s play; a fool could do it as Gordon Brown proved. As Cassidy writes:

“Before the last election there, which took place in May, 2010, the U.K.’s economy appeared to be slowly recovering from the deep slump of 2008-09 that followed the housing bust and global financial crisis. Just like the Bush Administration (2008) and the Obama Administration (2009), Gordon Brown’s Labour government had introduced a fiscal stimulus to help turn the economy around. G.D.P. was growing at an annual rate of about 2.5 per cent.”

Indeed, but that was achieved simply by the spending of 160 billion borrowed pounds in one year. To repeat, if you borrow and spend lots of money you will see an increase in a measure of spending, GDP. This is not rocket science.

And just as this should be obvious, so it should also be obvious that such a strategy has limitations. Governments cannot keep adding to their debts indefinitely especially when, as the Labour government did in Britain, they were doing so during the growth years as well.

Secondly, let us ask what the point of ‘stimulus’ is. It is, as obviously as anything else, to stimulate economic growth, as measured by rises in GDP. Think of it like stabilisers on a child’s bike, they exist to keep the economy upright until such time as it can cycle off on its own.

But what if stimulus doesn’t actually stimulate anything?  What if, even after years riding his bike with stabilisers, your kid still can’t keep his balance unaided?

That is what the US GDP figures showed. Four years of unprecedented trillion dollar deficits have boosted GDP, an effect a sufficient level of spending is guaranteed to have on a measure of spending. But reduce government spending and GDP drops. The economy is still incapable of standing on its own two feet. The stimulus has failed to stimulate.

This suggests two things. First, the extra six and a bit trillion dollars of debt the Democrats have gleefully piled on their kids has failed to achieve its stated aim. Second, those Europeans with their ‘austerity’ might not be as daft as people like Cassidy say. After all, what’s the point in stimulus if it doesn’t stimulate?

This article originally appeared at The Commentator

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