Saturday, February 20, 2010

The recovery is still elusive

A year after the stimulus packages were enacted, Barack Obama is still claiming that the stimulus worked, that it created or saved jobs, and that without it the country would still be in a recession, or perhaps even a depression. Most libertarians would laugh at the claim, but as Ayn Rand pointed out, if you want to know if something is right you have to ask "by what standard?"

What exactly did the stimulus do? The stimulus created temporary government jobs to mask unemployment. Since government spending is included in GDP calculations, it increased the GDP, and then later when the money cycled through the banks it enabled failing banks to show a profit and give bonuses, thus creating a secondary GDP boost. The true point of the stimulus was to make the numbers look good, and since the stimulus made the numbers look good the stimulus actually worked.

By the standard of creating an economic recovery the stimulus was a failure though. The money to pay for the stimulus was borrowed, creating an imminent threat of massive inflation, perhaps even hyper-inflation. While make-work jobs, supposedly shovel-ready, were created, those jobs were not jobs that add to the economy in the long run.

Since "recession" is defined by consecutive quarters of negative GDP growth, it is true that the stimulus put a hiccup in the recession. Some analysts will undoubtedly say that the recession ended and a new one began a quarter later. If the current method of calculating is to be believed, then yes, the stimulus ended the recession - but at the cost of exacerbating the depression.

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