Why Stimulus Cannot Work

A Journal Op-Ed presents research from George Mason economists Garett Jones and Daniel Rothschild, that shows stimulus didn't work, in part, because it was implemented poorly and wastefully.  The truth is readily apparent upon any reflection that even an efficiently executed stimulus program could never have worked.

As explained by the President, stimulus is meant to "break the vicious cycle where lost jobs lead to people spending less money, which leads to even more layoffs.".  Stimulus is meant to work by creating a virtuous cycle where stimulus payments lead to people spending more money, which leads to more hiring, which leads to even more spending.  This will only work to the degree that businesses confuse stimulus-driven spending with actual economic signals and hire.  The more aware businesses are of what the government is doing, the more they will inevitably hold off hiring until they perceive it to actually be working.  The more managers hold of hiring, of course, the less effective the stimulus.

Further, stimulus is more effective the more the economy is being impacted by the vicious cycle, when people are spending less because they fear working less, and will spend more when they expect to work more.  Stimulus will necessarily be less effective if people are saving more for other reasons independent of job prospects.  In this particular, people are saving more and spending less because they are fearful for their retirements.  American's largest investment tends to be their homes which are not, now, worth what they were.  In addition, policies debasing the currency debase also people's savings.  Finally, people are recognizing that government may not be able to fulfill its social security and pension commitments.

In other words, sensible entitlement reform and bringing the deficit under control to restore confidence in the government's ability to keep its commitments, strengthening the currency and allowing the housing markets to work themselves out stand to work where keynsian stimulus will simply not.