Limits Of Stimulus

The Labor Department reports that the economy lost a net 54,000 jobs in August.  Most analysts will inevitably focus on two things:  (1) the loss in jobs was less than expected so equity markets will respond positively (market analysis) and (2) the continuing economic weakness will nonetheless worsen Democrats’ political prospects in the midterm elections (political analysis).

I want to focus on a practical analysis instead.  Overall job losses were expected because a large chunk of jobs were known in advance to be ending.  The Census Bureau ended 107,000 temporary jobs in August, a number which in combination with other cuts in state and local government jobs overwhelmed modest private sector job increases.

This is important because it flies directly in the face of the “let’s have another stimulus, and bigger this time” policy prescription championed by many Democrats (most notably and angrily, former economist Paul Krugman).  The problem is simple: benefits of government stimulus are inevitably temporary, but its costs are permanent.

Jobs produced by government stimulus only function until the funds appropriated run out.  for example, many of the job cuts we are seeing now at the state and local level are simply postponed job losses from 2009.  Stimulus funds paid for a year, but then the state and local budgets returned to their naturally reduced levels.  Unless the federal government is going to sign up to permanently pay those salaries, the jobs “saved” by the “stimulus” weren’t saved at all.  The promise of renewed job stability was a lie.

Another round of stimulus would just kick the can down the road another year.  And because it could be funded only by issuing new debt that would soak up even more investment capital, the temporary benefit would come at the permanent cost of continuing to depress overall private sector investment and growth.  Moreover, the continuing costs of servicing that debt (which will inevitably rise once the current refuge flight to Treasury securities fades and/or when China finally decides that it is no longer in its interest to fund unsustainable American profligacy) will act as a permanent drag on the U.S. economy, soaking billions out of the economy ever year essentially forever.

Maybe kicking the can down the road is worth it.  If the stimulus effect is a bridge to a time when greater economic growth can be reasonably expected to emerge in sufficient strength to counteract the effects of debt-funded stimulus, then maybe there is a sound argument to be made for it.

But the advocates of another stimulus — Krugman and his fans — haven’t troubled themselves to make that argument yet.