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The charts that could doom Obama

Obama is not alone in seeing his "stimulus" fail to stimulate but that will be of little comfort if he loses out in November

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Obama's ARRA was a flop. Will that matter come November?
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John Phelan
On 6 June 2012 09:52

In February 2009, less than a month after Barack Obama was sworn in as President, the $831 billion American Recovery and Reinvestment Act came before Congress. If the ARRA was passed, President Obama promised, unemployment would peak at 8 percent in late 2009 and would have fallen to a little over 5.5 percent by May 2012. President Obama painted a doomsday scenario if the ARRA wasn’t passed; unemployment would peak at 9 percent in 2009 and by May 2012 would still be at 6 percent.

President Obama got his Act and the graph below shows what Americans got for their $831 billion.

Unemployment peaked at 10 percent in October 2009 and in May 2012 was 8.2 percent. In other words, even with Obama’s $831 billion package, unemployment peaked later, peaked higher, and remains higher than in the doomsday scenario he said would befall America if the ARRA wasn’t passed. The American economy outperformed even President Obama’s own worst case scenario. The Republicans should send a copy of this chart to every household in the United States. 

To call the ARRA ‘stimulus’ is surely a mistake; it hasn’t stimulated anything. But this isn’t a one off. Despite what Keynesians say, the idea that government spending can stimulate an economy beyond the very short term is a complete myth. 

The chart above shows data for EU and G20 member states from 2011 on budget deficits and economic growth. It shows a clear trend: countries with higher budget deficits are experiencing lower growth.

A snapshot might not be too useful so what about over time?

This graph uses data for the EU and G20 member states on changes in growth and budget deficits from 2010 and 2011. Again, the trend is clear: countries that reduced their budget deficits between 2010 and 2011 could expect to see higher growth.

This is not to say that the act of cutting budget deficits of itself caused higher economic growth; correlation does not equal causation. But it does show that cutting budget deficits is not the route to economic meltdown. And it does show that state ‘stimulus’ spending is not the passport to prosperity some people like to make out.

People like Paul Krugman, who was in town last week to plug his new book which takes 259 pages to convey one bone-headedly simple message: keep spending. Krugman wrote recently that “All around Europe’s periphery, from Spain to Latvia, austerity policies have produced Depression-level slumps and Depression-level unemployment.”

Nothing of the sort has happened. As we see, countries enacting ‘austerity’ policies are doing slightly better than those which, relatively, aren’t.

Krugman complains that spending cuts aren’t really about controlling runaway government spending at all; this is all simply a cloak behind which conservatives are hiding the moves towards a small state they desire. This is, to say the least, an idiosyncratic view of a British government which is going to oversee an unprecedented peacetime rise in the national debt of 60 percent during its term in office. In truth, in clinging onto the belief that government spending creates sustainable economic growth which is being discredited around the world every single day, it is Krugman who is still pushing his failed, dangerous ideology in the face of all the evidence.   

Krugman is not alone. His British Mini Me, Will Hutton, has taken to the pages of the Observer to blame austerity for the parlous state of the global economy. Hutton says that in Britain “manufacturing suffered its biggest plunge for three years, and this in an economy already suffering its longest depression since the 19th century. American jobs growth is petering out. Unemployment in Europe averages 11%”

But look at Britain with its budget deficit of 8.1 percent of GDP. Look at the US with its budget deficit of 9.7 percent of GDP. Look at Ireland, Greece, Spain and France with their budget deficits of 11.2 percent, 7.3 percent, 6.9 percent and 6 percent of GDP respectively and ask yourself in which mad universe these countries can be said to be applying ‘austerity’.

Contrary to what Krugman, Hutton, and others argue it is not ‘austerity’ which has failed, it has barely been tried. Over the last three years Britain’s budget deficits have been 10.3 percent, 10.2 percent and 8.1 percent. According to the Keynesian theory the British economy should be in fine fettle yet it’s still in the tank. It is Keynesian deficit spending that has failed. 

You would have to be a complete fool impervious to all evidence to cling like Linus with his blanket to the idea that we could get more economic growth if only the government would spend more money. President Obama is not alone in seeing his ‘stimulus’ fail to stimulate but that will be of little comfort if he is calling the removal men in November.  

John Phelan is a Contributing Editor for The Commentator and a Fellow at the CobdenCentre. He has also written for City AM and Conservative Home and he blogs at Manchester Liberal. Follow him on Twitter at @TheBoyPhelan

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