Thursday, June 14, 2012

Here, in somewhat more than 20 words, is an explanation of why Obama's stimulus failed:

First, and most important, one needs to understand that the ultimate goal of a stimulus is NOT to 'create' jobs (shovel ready or any other kind), but rather to persuade businesses and consumers that they no longer need to worry about the future.

An economy falls into recession when something happens that makes businesses cut back on employment and investment and consumers cut back on their spending.  The 'something' can be almost anything: the popping of an economic or technological bubble of some kind, a tightening of available credit, a terrorist attack, an outbreak of disease, a fear of having less money than one needs in the future.  The actual substance of the event doesn't matter as much as that it be sufficient to make enough people worried.
While unpleasant on its own, the real danger is that these cutbacks in spending and investment will trigger another round of angst and further cutbacks, both on the part of those initially cutting back as well as those who weren't worried to begin with... and on and on and on until there's a total collapse of the world's economies.

To keep this from happening, government steps up with a 'stimulus'.  As I wrote at the top, the goal of a stimulus is to break this self-fulfilling run of fear and cutback.  Per Newton's laws, an object in motion stays in motion unless and until enough force is applied to that object to change its motion.  In this case, the stimulus is that force.

In order to succeed, a stimulus has to convince people that it okay if they don't cut back on their investment and spending.  The actual composition of the stimulus matters less than the fact that people believe that it will keep the world from coming to an end.  If they do believe in the stimulus, they won't cut back and the economy will soon resume its natural growth. 

If, on the other hand, the stimulus doesn't persuade us that things are going to be okay, then we won't stop worrying and we won't stop cutting back.  And even worse, a stimulus that makes us more worried about the future than we were before the stimulus was put into effect will not only not help, it will aggravate the worry and the severity of the cutbacks.

And this, unfortunately (and predictably), explains why Obama's stimulus failed. Rather than reassure us, it made us even more worried.  The combination of:

(1) The huge amount of spending and the areas in which the money was being spent,
(2) The concern that this increased spending would be permanent rather than temporary,
(3) The arrogance on the part of those putting together the package, along with
(4) Obama's other policies (such as the threat of tax hikes, anti-employer regulations and his wanting  to raise the price of gas)

all played a part in making businesses and consumers more fearful about the future. 

And with predictable results: we haven't increased our hiring, we're still looking to do more with fewer people, we're not re-investing our profits and consumers are not dramatically increasing the amount of money they're spending.

That is why Obama's stimulus hasn't worked.  And that is why the economy isn't going to get any better... not unless and until either puts forth some different proposals... or until someone else sitting in the White House does.