Fiscal stimulus failures

“Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’ The answer is yes, that's what I’m telling you.”
-- Vice President Joe Biden

When the Obama Administration proposed to kickstart the economy through passage of a "stimulus" bill last year which emphasized spending on infrastructure projects, I pointed out that such an approach had already been tried without success in Japan. I further noted that German infrastructure spending to rebuild East Germany during the 1990s likewise failed to generate an economic boom. In the current recession, meanwhile, there doesn't appear to be any obvious correlation between government spending and economic recovery.

In fact, I can't think of a single instance in which massive public sector spending has produced sustained economic growth or anything more than an ephemeral "sugar rush" in GDP stats (and no, I don't see World War II with its widespread rationing and emphasis on military production which had limited use at the conflict's end as a great model to follow).

The current debt crisis in Greece and other European countries has focused attention on two more failures of this approach. Greece, The Sports Economist reminds us, lavishly spent taxpayer money in preparation for the 2004 Olympic games:

Greece's federal government had historically been a profligate spender, but in order to join the euro currency zone, the government was forced to adopt austerity measures that reduced deficits from just over 9% of GDP in 1994 to just 3.1% of GDP in 1999, the year before Greece joined the euro. But the Olympics broke the bank. Government deficits rose every year after 1999, peaking at 7.5% of GDP in 2004, the year of the Olympics, thanks in large part to the 9 billion euro price tag for the Games.

For a relatively small country like Greece, the cost of hosting the Games equaled roughly 5% of the annual GDP of the country. Of course, the Olympics didn't usher in an economic boom. Indeed, in 2005 Greece suffered an Olympic-sized hangover with GDP growth falling to its lowest level in a decade.

While the Greek government would likely proclaim that such infrastructure spending produced untold numbers of jobs "saved or created," it has undoubtedly contributed towards the country's current economic tailspin.

Another country financial experts are keeping a close eye on is Spain, which faces questions about its own fiscal future and ability to service its burgeoning debt. While any number of factors can be blamed for Spain's current economic woes, a lack of government expenditures certainly is not among them. Indeed, over the past two years the country's government has passed not one, not two, but three stimulus packages:

The third package, announced in November 2008, is worth $21 billion. Of it, $12 billion is for infrastructure projects. Another $1.2 billion is for Spain’s ailing car industry. “We hope this will generate 300,000 jobs within a year,” Jose Luis Rodriguez Zapatero, the Spanish Prime Minister, told parliament. “These are urgent measures to generate jobs."

Sounds familiar. The Obama Adminstration promised hope, change and a non-ideological, pragmatic approach. Instead we have been given recycled big government whose shortcomings, having already been demonstrated numerous times before, are on display once again. The administration is not breaking fresh ground, but simply traveling down a well-trodden path towards failure. That so much money is being spent to so little effect is frustrating enough, but the sheer predictability of it all is simply maddening.