Tuesday, March 02, 2010

There's a debate over the correct 'multiplier' to assign to government spending, with proponents of government spending arguing that a dollar of government spending 'produces' more than a dollar of economic activity and opponents arguing the opposite.

But for the most part, both sides make the mistake of viewing government spending is government spending is government spending... it isn't. There is government spending that produces a positive response (with positive defined as net economic growth) and there is government spending that doesn't produce a positive response.

The distinction? Government spending that stimulates optimism produces growth while spending that either fails to stimulate optimism or reinforces pessimism results in no positive impact.

So in analyzing any particular government stimulus effort (or, for that matter, any action of government), you have to look at both the sum and the pieces of that program to ascertain the public's reaction in order to predict the economic results.

For example, with 'Cash for Clunkers', the public understood it was not only a short-lived program but it would also just accelerate the sale of cars from the period in which they would otherwise be sold... so the public was unimpressed and the program did nothing to lift spirits and thus did nothing to boost long term economic measurements. On the other side, with Larry Summers boo-hooing the negative impact of the big snowfalls last month, the public knows snowstorms are one time events and really aren't indicative of long term shifts so I don't anticipate a huge drop in consumer confidence when the snow-affected statistics are released.

The problem with Obama's trillion dollar stimulus plan is that it didn't generate positive excitement. The public didn't view it as a wise expenditure, they didn't think they personally were going to benefit and given the huge budget deficit, they figured spending that much money was going to haunt them in the not-too-distant future... thus, and appropriately so, the public confidence wasn't boosted and Obama got precisely squat for all that money.

It is not the amount of money that is spent, nor is it the specifics of what the money is being spent on, it is whether the public thinks spending that money is good. If they think that, they'll be happier and growth will occur. If they don't, they won't be happier and there won't be any growth.