Another Study Shows Stimulus Spending Doesn't Work

A new study proves that the government cannot spend its way out of a sluggish economy.

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No matter what the question, President Barack Obama is sticking to the position that all the economy needs to blast it out of the doldrums is another round of stimulus spending.

The first effort to stimulate the economy through massive spending didn't work out so well. Unemployment, which the president promised would not exceed 8 percent if the stimulus package were adopted, has been somewhere north of 9 percent for much of his presidency. Joblessness is a now national crisis while, on his watch, the debt to U.S. GDP ratio has reached one-to-one.

The president needs to take a long hard look at what he has been doing and, if he's smart, change course. The one he has the country on just isn't working. A new study from the Phoenix Center for Advanced Legal and Economic Policy studies explains why.

[See a collection of political cartoons on the economy.]

The study, "Can Government Spending Get America Working Again," looks back over 50 years of data to examine the effectiveness of government in creating jobs and shows how government spending has had zero effect on private-sector job creation in periods of economic sluggishness.

"Our study confirms from 50 years of economic data what most Americans already know firsthand," Phoenix Center President and study co-author Lawrence J. Spiwak said.

Government can't spend the country into prosperity. Instead, if we want to create more jobs, then we need to enact policies such as tax and regulatory reform to get the private-sector investing in America once again.

[See an opinion slide show of 10 wasteful stimulus projects.]

One of the center's key findings is that, during periods of economic sluggishness, "government spending has zero effect on private-sector job creation. This result is consistent with the apparent impotence of huge federal government spending increases in recent times aimed at reducing unemployment."

The group said in a release,

In contrast, when it comes to job growth, expansions in private investment are effective at creating jobs in both good and bad economic times, but the efficacy of private investment is greater during periods of slow economic growth. By implication, policies that discourage private investment may have severe job-killing effects during economic downturns, since it is during the low growth periods that jobs are most responsive to increases in private investment.

[Debate Club: Does Stimulus Spending Work?]

"The response of jobs to spending, whether by the government or by the private sector, differs between periods of economic expansion and economic sluggishness," adds Dr. George S. Ford, Phoenix Center chief economist and co-author of the study.

When the economy is lethargic, as it is now, we find that government spending has no effect on private-sector job creation, but at the same time, private investment is more potent than ever. The implication seems clear—the government needs to focus on private-sector recovery. By most accounts, including President Obama's, this means significant reform of the nation's regulatory bureaucracy.

Policymakers would do well to examine the study and its conclusions closely, especially those members of the so-called congressional super committee that is drafting a plan to find further reductions in federal spending as part of the deal to give President Obama the increase in the federal debt ceiling he asked for. More spending is not the answer. Tax reform that lowers rates while eliminating special interest loopholes, regulatory reform, and a reduction in the capital gains tax rate—all of which would spur private investment in the economy—is.

  • See a collection of political cartoons on the budget and deficit.
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