Stimulus Spending is Not Stabilizing the Economy

| by Reason Foundation

By Jacob Sullum

On Friday, anticipating the weekend's meeting of the G8 finance ministers, The New York Times reported that the U.S. economy "might be stabilizing, if not rebounding, even as economic reports in Europe remained gloomy." The front-page story said "the apparent divergence of fortunes between America and Europe highlighted the different approaches to solving the financial crisis, and why some economists say the more aggressive American strategy may be working better." According to the Times, "the most stark" difference between the American and European responses was "Washington's willingness to commit hundreds of billions of dollars to stimulus spending," while European leaders worried that "similar spending would increase inflation in the future." The Times explained that "the argument behind the American approach—staggering stimulus spending—is that the economy must be prevented from falling into a self-perpetuating downward spiral, and that increasing the deficit to do that is prudent."

One problem with attributing America's slightly less bad economic news to the Obama-backed $787 billion stimulus package is that very little of the money actually has been spent. As of a month ago, less than 6 percent of the stimulus money had gone out, and only 25 percent is expected to make its way into the economy by the end of the year. Assuming the spending is spread evenly over that period, less than 9 percent has been spent so far. That's not even one-tenth of an amount that Treasury Secretary Timothy Geithner suggested would prove inadequate.

In the 13th paragraph (the traditional burial spot for crucial concessions), the Times alluded to the problem of effect preceding cause, allowing that "it is impossible to know how much the apparent, if nascent, stabilization of the American economy comes from the stimulus spending and how much from moves like propping up the banking and credit systems, especially because much of the stimulus money has yet to make it to the economy." I'd say 91 percent is a bit more than "much."