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The Wall Street Journal: Welcome to the Era of Nonstop Stimulus

January 04, 2021
Image for The Wall Street Journal: Welcome to the Era of Nonstop Stimulus

Article by Phil Gramm and Mike Solon in The Wall Street Journal

When President Obama’s last Treasury secretary, Jack Lew, made the extraordinary claim that the Obama economic recovery failed because Washington “stopped [spending] too soon last time, and fiscal tightening after 2010 slowed the recovery” it sounded like another over-the-top argument for more stimulus. But with President-elect Joe Biden now making it clear that the recent $900 billion stimulus will “at best only be a down payment” and the now $3.3 trillion of total stimulus spending “is just the beginning,” it sounds like America is headed into a program of permanent stimulus.

Between the start of the subprime mortgage crisis and the end of the recession in mid-2009, net new spending of $1.6 trillion was enacted. In 2009, federal spending as a share of gross domestic product surged by an unprecedented 4.2 percentage points to reach 24.4%, the highest level since World War II. Spending was 23.3% of GDP in 2010.

But what happened after 2010? At 23.4%, 2011 had the second-highest level of federal spending as a share of GDP since World War II—almost one-fourth higher than the postwar average before the Obama era. This is the year when, according to Mr. Lew, federal spending started to plummet. In 2012, federal spending was 22% of GDP, less than the stimulus years but still the fourth-highest level in the postwar period to that point. And 2012 was 3½ years after the recession ended.

To further help the economy, the Fed initiated a massive monetary easing. The Fed purchased, or offset by purchasing other securities, more than 55% of all federal debt issued during 2010-13—far more than the 10% of government debt the Federal Reserve purchased during the entirety of World War II.

Yet the greatest stimulus, the biggest deficits and the largest monetary accommodation were no match for the negative onslaught of Mr. Obama’s program of tax, spend and control. Economic growth from 2010-13 averaged less than 2.1%.

The suggestion that anything less than stimulus levels of spending is economically harmful is effectively a call for a new era of permanent stimulus. This appears to be what Messrs. Biden and Lew, and future Treasury Secretary Janet Yellen, are now proposing.

In reality, stimulus spending has nothing to do with good long-term economic outcomes and everything to do with political outcomes. What is socialism except a permanent stimulus? When private investment buckles under confiscatory taxes and productivity falters with the decline of private innovation, socialism employs unending stimulus to substitute public “investment” for real private investment, and public initiative for private initiative in research and development funding. Mr. Biden and Bernie Sanders’s “Unity” document is a ready-made playbook for this program.

With or without permanent stimulus, if tax, spend and control policies are about to return, the economy won’t stay strong. And if private investment and individual initiative falter under such a program, a permanent stimulus will be demanded. How does it end? With Treasury debt already set to reach 108% of GDP, and Fed assets to finance that debt already 7.8 times the precrisis level in 2008, it isn’t a question of if government is going to run out of other people’s money, but ....

To read this article in The Wall Street Journal in its entirety, click here.

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