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Editorial: The unfinished stimulus

BY DI EDITORIAL BOARD | FEBRUARY 19, 2014 5:00 AM

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Monday marked the fifth anniversary of the implementation of the American Recovery and Reinvestment Act of 2009, better known as the Stimulus Package.

The bill, a massive conglomeration of public works, tax incentives, and the expansion of unemployment benefits, was a $891 billion response to, in what has become almost a cliché to say, the most destructive financial collapse this country had faced since the Great Depression.

Now, with five years of hindsight, we believe that the stimulus, while certainly improving the economic health of the country, did not go far enough in terms of alleviating the fundamental problems at the heart of this recession.

Passed with essentially zero Republican support, the stimulus has been controversial from the start, with critics deriding it as yet another experiment in a government trying to bail out the economy by wastefully spending.

The evidence however, does not support this conclusion. Daniel J. Wilson of the Federal Reserve Bank of San Francisco has shown that the stimulus created around 3.2 million jobs, and the CBO estimated that the stimulus increased the GDP by between 1.1 and 3.1 percent.

A better assessment of the economic data on this matter is provided by Dylan Matthews of the Washington Post, who compiled a multitude of studies that offered a variety of opinions on the stimulus. Matthews found that the more optimistic studies tended to have fewer flaws than the studies that cast the stimulus in a negative light, leading him to conclude that the data seemed to suggest that economic stimulus had a mostly positive effect on the country’s economic condition.

However, even though the stimulus did have a positive effect in the fight against the recession, it clearly did not go far enough. Nobel Prize winning economist Paul Krugman has suggested that the stimulus would have needed almost $2.9 trillion in spending in order to successfully reverse the effects of the recession, falling well sort of the bill’s $891 billion price tag.

The basic problem at the heart of this recession, as economists such as Krugman have suggested, is a lack of demand — people aren’t spending money. So, while the private sector holds on to its money, the government ought to spend money on projects such as infrastructure, boosting entitlements, and other programs in order to increase demand and get people spending again. This in turn will encourage the private sector to free up its assets, restoring economic growth.

Looking at how other countries have handled the Great Recession shows the value of this approach. While countries that embarked on radical austerity programs, such as Great Britain, Greece, and Spain, have led those economies into double-dip recessions and, in the case of Greece, full-on depression, nations such as Japan, which engaged in massive public works spending, have seen their economies grow at rates not seen in years.

It is our view that, in the wake of the fifth anniversary of this cursory attempt at Keynesian economics, that the U.S. government implement renewed stimulus spending in order to bolster an economy that has been stagnating for almost half a decade. We must reverse the culture of austerity and gridlock that has gripped Washington and massively mobilize our countries resources in order restore our economy to a state that is not only healthy but thriving.


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