Stimulating Questions

Why didn’t the stimulus work?

Three years and $900 billion later, unemployment is still over 9% and economic growth is anemic. Some economists point to the large pool of unemployed and see huge potential—an economy operating way below where it could. The solution is for the government to spend more, boosting aggregate demand and jump-starting things. New jobs would then have a multiplier effect across the economy. But that hasn’t happened. It’s fair to ask why.

The proponents of government action say we didn’t spend enough. But you could always say that. Instead, a couple of scholars interviewed 85 firms in five regions that received stimulus money, and they found that hiring workers is a lot easier than creating jobs. For the most part, firms hiring new workers hired people already working. But the places they left didn’t go out and replace them. Like anyone facing uncertain times, they increased their savings and did more with less.

Only 40% of the interviewed firms hired people that were unemployed. Much of the stimulus money also went towards other projects, like buying land, helping homeowners, and other things. Of the $900 billion, only about $250 billion went to the unemployed. Spread that over three years, and note that people who have lost a job once may be a little cautious in their spending, and you get about a half-percent boost to the economy—in line with what’s happened.

Sure, you could always spend more. But isn’t that what Einstein defined as insanity—doing more of the same and expecting different results?

[display_podcast] Stimulating Questions

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