What did the Keynesian spending spree buy us? Mostly just debt.

At the risk of oversimplification, John Maynard Keynes and his contemporaries, such as Nobel Laureate economist Joseph Stiglitz , advocate for an active (interventionist) fiscal policy centered around “strong government expenditures” in infrastructure. (link). According to Keynes’ school of economic thought, governments can literally spend themselves out of recessions. Indeed, the idea of a stimulus package at all is distinctly Keynesian.

In the United States, the most oft-quoted number associated with the size of the stimulus package is the $800 billion allocated by the American Recovery and Reinvestment Act, but estimates of actual size range from $1.7 trillion to as high as $2.4 trillion. Questions about the the actual size of the stimulus notwithstanding, its impact was less than expected:

Unsurprisingly, Nobel Laureate and Keynesian economist Paul Krugman was quick to provide an explanation: however much we spent, it was not enough. What then, would have been enough? If the gap between potential and actual GDP is any indicator, and many think that it is, the 2008 financial collapse will end up costing the U.S. an expected $5.7 trillion:

(CBO source). So what does that mean? Assuming, arguendo, that an interventionist fiscal policy is even a good idea, it would have cost almost $6 trillion to spend ourselves out of this recession. For comparison, the GDP of the U.S. in 2011 was $15 trillion.  Thus, in a sense, Krugman was right: the government didn’t spend enough.

Yet, from the perspective of classical liberalism, it is unsettling that the federal government can shift such massive amounts of money around without raising taxes or cutting existing spending. Setting aside the fact that the government doesn’t produce anything in the economic sense, and rejecting the idea that government outlays can “create ” more wealth than private citizens would have created with the same amount before it was taxed, this spending is especially pernicious because its being financed with public debt.

Right now, U.S. national debt is almost $16 trillion dollars, more than our annual GDP; last year, we paid a staggering $454 billion in interest. Considering total federal revenue for the same year was $2.3 trillion dollars, just under 20 cents of every dollar taxed goes to paying interest. So why does this matter?

An individual’s standard of living decreases proportionally to the amount they are taxed. Everything else being equal, the more money taken from them, the less they have to spend on what they want. As the national debt grows via deficit spending, future generations are being left with an increasingly heavy debt burden. In other words, current government spending is mortgaging our collective future standards of living.

While the provision of a stable market is a legitimate government function, and there are studies suggesting that some of the stimulus money may have actually had the desired effect: lessening the severity of the recession, viz., bailing out Bear-Sterns. However, the bulk of stimulus funds have failed to have their desired impact, and could have been employed more effectively; for example, $40-50 billion would have bailed out the Lehman Brothers, which would have prevented a cascade of bank failures, thereby lessening the depth and length of the crisis. Instead, what we got was a largely haphazard and feeble waste of taxpayer dollars.

In March of this year, the Inspector General of the Department of Transportation reported to congress that the Department of Justice was investigating forty-seven cases of fraud. Interestingly, even though the head of the Recovery Accountability & Transparency Board – the agency tasked with combating fraudulent use of stimulus funds –  estimates fraud losses could be as high as $55 billion, he has an incentive to NOT find malfeasance because it would be politically damaging to the president that appointed him. It is not surprising that the government recovery website has  three links on every page to report fraud, but is scant on the details of its success. Despite 464 prosecutions, searching for “fraud” on the recovery website suggests a little less than $3 million has been recovered.

In the end, whatever good the stimulus package may have done is outweighed by the bad, and the stimulus’ greatest legacy appears to be trillions in debt.


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