Stimulate This!

One of the last great rallying cries of the failed Obama economic policy is “Not Enough!” If we had just spent $2 trillion in stimulus instead of $1 trillion, everything would be peachy by now. Unemployment would be 5%, GDP growth would be 4% per annum, birds would be singing, fish swimming joyfully, and the world would be a wonderful place. As politics go, it’s not a bad strategy because it’s technically impossible to prove it wrong without actually doing it, which, thank God, everyone knows we won’t. Admittedly, it has little credibility especially considering its very architect promised us that the first trillion would bring unemployment down to 6% (oops).

Today’s Wall Street Journal published data that puts a final nail in the coffin of this straw grasping exercise by the administration. I refer you to the original WSJ piece by world renown economist Arthur Laffer for more detail. His piece is worth reading, but it’s an op-ed piece so let’s recognize it as such and go to the original data. A picture tells a thousand words. In fact, I found Laffer’s presenation of OECD data in tabular format very hard to interpret. So, I dropped it into an excel spreadsheet and plotted the change in real GDP growth (2007 to 2009) vs. the change in government spending over that time period for all 34 OECD countries.

If government stimulus were a good way to grow out of recessions, these data would look like a line sloping up and to the right. As you can see, the best fit line is down and to the right, indicating that the more governments spend on stimulus, the less they grow. The linear regression coefficient is 0.51, meaning that about half the entire effect in the dependent variable (GDP growth) is explained by changes in the independent variable (government stimulus). Whenever you can explain 50% of ANYTHING in economics with one factor, you’re onto something.

Thus, if one were sitting in a philosophy class, it would be impossible to prove that additional stimulus spending wouldn’t have further grown the U.S. economy. But, if you’re in an econ class, the results are quite clear. More spending leads to slower growth across the globe. R.I.P. John Maynard Keynes.

About Bruce Robertson

Bruce Robertson is an amateur writer and professional provocateur
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2 Responses to Stimulate This!

  1. I don’t know any economics. I don’t know where to find charts (except here in your blog). I do know that, for every economist who says stimulus programs do very little, there are others who say non-stimulus does nothing. Are you right because you have a chart? Am I wrong because I don’t have a chart? There are many points of view in a field in which there are huge number of variables. I’m not sure it’s safe to assert that you have an open and shut case. It’s hard to make room for doubt in one’s firmly held philosophy, isn’t it?

  2. Whoa, slow down Speed Racer! You presented a point of view. I presented data from OECD that disproved your point of view. Your answer is, “yeah, but lots of other people hold my point of view.” I’m not sure in what fields the “it’s true because I want it to be true and so do some other people” trumps data, but not any of the ones I’ve worked in. Are you suggesting my raw data is fabricated, by me or by OECD? Or, that my analysis of the data is incorrect? It’s not about having charts. It’s about being able to support ones views with facts!

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