Video: A case study of the stimulus

Why did the 2009 stimulus plan fail to keep unemployment below 8%? Barack Obama claims that the economic collapse was more severe than his advisers first knew, but that’s a smokescreen for incompetence and ideological blindness. Reason and Reason TV combine forces to plumb the reasons for this failure by taking Silver Spring, Maryland as a test case.  The city and the state got hundreds of millions of dollars in stimulus funds.  How did that work out?  Not well, as Veronique de Rugy explains in this video:

The ground rules for stimulus dollars, as laid out by Obama’s top economic adviser at the time, Larry Summers, were based on the insights of legendary 20th-century economist John Maynard Keynes. The funds were to be “targeted” at resources idled by the recession, and the interventions were to be “temporary” and “timely,” injected quickly into the economy.

None of that turned out to be true. “Even if you were to believe that government spending can trigger economic growth,” says reason columnist Veronique de Rugy, a senior research fellow at George Mason University’s Mercatus Center, “the money is never spent in a way that’s consistent with the conditions laid out by the Keynesians for it to be efficient.” …

In Maryland, the “specialty trades,” a subset of the construction industry that handles big infrastructure projects, have lost an estimated 8 percent of their work force since the stimulus was passed, amounting to 8,000 jobs. Against that backdrop, the state’s Department of Transportation says stimulus money for transit projects has paid for the full-time salaries of about 600 construction workers since the middle of 2009.

Why didn’t Maryland’s $771 million in stimulus outlays for transit infrastructure have a bigger impact on the local economy? Partly because Gov. Martin O’Malley cut his own infrastructure budget more than enough to offset gains from the stimulus. Maryland’s Transportation Trust Fund generally pays for highway repairs by collecting a special gas tax and other user fees. After the stimulus money was made available, O’Malley raided the trust fund, diverting $861 million during the next three years to help balance the state budget, according to information provided by Maryland’s Department of Legislative Services. Even with the stimulus, state spending on transit infrastructure has seen a net decrease of $90 million since 2009.

That sort of scenario played out all across the country. Stimulus dollars were used to cover general expenses rather than activating idle resources.

For the most part, the stimulus had three major components.  The first was a big chunk of money dedicated to subsidizing the green-tech industry, followed by supposedly “shovel-ready” construction/transportation jobs and finally huge block grants to states in an attempt to keep them from laying off bureaucrats.  The latter got disguised by rhetoric about saving the jobs of teachers and first responders, but the block grants got used by the states in exactly the same manner as the construction and transportation funds did — papering over deficits in order to avoid the tough choices needed for right-sizing state governments.

The construction and transportation jobs didn’t actually come from new public-works projects, either.  The ARRA simply accelerated routine maintenance projects already on the books in states and local communities, like road repair and bridge updates.  The pretty orange signs dotting the highway took credit for work that would have been done anyway through normal transportation funding over the next couple of years.  It was the public-sector equivalent of Cash for Clunkers and the new-home tax credit: it stole demand from future quarters in order to momentarily boost economic figures for political purposes.  That didn’t create or save jobs at all, as Reason points out in the video.

The only positive outcome from the stimulus is that it put an end to the fantasy that top-down control of the economy and government intervention creates economic growth.  If we learn that lesson for more than just a few years, it might make the huge loss and our current economic stagnation worth it.

Update: Reader Juan B corrects me on the city name — it’s Silver Spring, not Silver Springs.  I’ve fixed it.

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