Art Cashin Talks About The Stimulus That Never Was

Posted By on December 9, 2010

December 9, 2010

Excerpts from Art Cashin on the floor of The New York Stock Exchange

Back in February of 2009, we wrote in these Comments that there was nothing stimulating in the proposed “stimulus package”.  We were not alone in that assessment.  Our good friend, Dennis Gartman, and several others voiced the same doubts and concerns.

In the 22 months since, the ineffectiveness of the stimulus package has become much more evident to many more people. Some like, Paul Krugman, had maintained the failure was because the package wasn’t big enough.  We’ve always felt it was structurally flawed and improperly designed.  Now there appears to be more evidence that the flaw was, in fact, in the design.

Here are some points from a fascinating op-ed in today’s Wall Street Journal:

Although the policy debate has mainly focused on the multiplier’s size, data covering the first year and three quarters of the 2009 American Recovery and Reinvestment Act (ARRA) show that, despite the large size of the program, the dollar volume of additional government purchases that it has generated has been negligible.

The ARRA attempted to stimulae government purchases in two ways. First, it provided funds to finance federal government purchases of goods and services; mainly for infrastructure, law enforcement and education. Second, it provided grants to states and local governments to enable them to increase purchases of similar goods and services.

The essay goes on to asses why and how it failed:

So where did ARRA’s state and local grant money go? While some of it increased transfer payments to individuals in the form of welfare and Medicaid, the major part was simply used to reduce borrowing. As ARRA grants increased, net borrowing by state and local governments decreased. In the third quarter of 2010, for example, state and local governments received $132 billion in stimulus grants at an annual rate. In that quarter they borrowed $136 billion less at an annualized rate than they had in the fourth quarter of 2008, even though their revenues from all other sources were only $76 billion higher.

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, regardless of the magnitude of the government purchases multiplier.

So, the stimulus was not stimulating because it was basically a wash.  The money never really got into the private sector.  No wonder there were no jobs produced.  I’m from the government and I’m here to help you.


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