The government bubble

John Taylor and John Cogan have a very important Wall Street Journal op-ed on what the Obama Stimulus did, or to be more precise, what it didn’t do. The critical point:

The bottom-line is the federal government borrowed funds from the public, transferred these funds to state and local governments, who then used the funds mainly to reduce borrowing from the public. The net impact on aggregate economic activity is zero . . .

The lesson is to beware of politicians proposing public works and other government purchases as a means to stimulate the economy. They did not work then and they are not working now.

Odds are Keynesians will quickly respond that transfer to state governments and actual public works purchases are not the same thing – something on which they were fairly quiet when they helped the president sell the stimulus last year.

There is something else, though, that has been overlooked: the Stimulus essentially became a vehicle for states and localities to temporarily deleverage themselves (i.e., reduce their debt levels), but they’ll either have to “releverage” when the money runs out or engage in the retrenchment that the stimulus delayed.

In other words, the president’s stimulus has created at government bubble, in which state and local governments look healthier than they really are.

The “dot-com bubble” led to the recession of 2000-1; the housing bubble led to the Great Recession. What will be the result of the inevitable popping of the government bubble?

Cross-posted to RWL

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  • Some valid points. Some of the results will depend on the attitude of the government at the state levels. As with people, some will fix their mistakes with an unanticipated bonus and some already budgeted for being rescued.

    There is an important distinction between Federal Debt vs. an unhealthy market & state debt and revenue problems. The Fed can print money or engage in “Quantitative Easing”. The states and people like you and I, don’t really have those options.

    We can only hope that most states took this as a one time event and spent that extra money on something with long term fiscal benefits.

  • valentinus

    I think that the country is facing an increasing divide between leftist socialistic states and more traditionally American states. To answer Mr Howard’s question: the leftist group of states views the Stimulus Pork bill as merely the first installment on a continuing “all you can eat” financial buffet. The second group either didn’t take much or viewed it as a temporary stopgap. What the Left and Dem pols are counting on is having the Feds loot the taxpayers in the second group of ststes to pay for the first grouo’s largesse. To accomplish this of course requires total control over the Fed budget and the Fed Reserve. This is why the Left is having a cow as the Admin is being squeezed back into a more traditional role.

  • Shaun Kenney

    Well said, D.J. — and it’s incredibly true. All we’ve done is shift the pain from private interests to the public purse. And when that pain comes to roost, it’ll be on the backs of those who can’t afford it… not those who can.

    Just wait until your localities are forced into tax hikes because of obligations and promises made from on high that local boards are forced to keep through unfunded mandates. That’s where the having of and eating of said cake can’t be held at the same time.

    …and the longer we delay, the worse the bubble becomes.

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