NEW YORK – As the green shoots of economic recovery that many people spied this spring have turned brown, questions are being raised as to whether the policy of jump-starting the economy through a massive fiscal stimulus has failed. Has Keynesian economics been proven wrong now that it has been put to the test?
That question, however, would make sense only if Keynesian economics had really been tried. Indeed, what is needed now is another dose of fiscal stimulus. If that does not happen, we can look forward to an even longer period in which the economy operates below capacity, with high unemployment.
The Obama administration seems surprised and disappointed with high and rising joblessness. It should not be. All of this was predictable. The true measure of the success of the stimulus is not the actual level of unemployment, but what unemployment would have been without the stimulus. The Obama administration was always clear that it would create some three million jobs more than what would otherwise be the case. The problem is that the shock to the economy from the financial crisis was so bad that even Obama’s seemingly huge fiscal stimulus has not been enough.
But there is another problem: In the United States, only about a quarter of the almost $800 billion stimulus was designed to be spent this year, and getting it spent even on “shovel ready” projects has been slow going. Meanwhile, US states have been faced with massive revenue shortfalls, exceeding $200 billion. Most face constitutional requirements to run balanced budgets, which means that such states are now either raising taxes or cutting expenditures –a negative stimulus that offsets at least some of the Federal government’s positive stimulus.