Hazlett in Chicago Tribune: Markets Do Not Believe "Stimulus"

A good way to gauge the effects of different choices on the health of the American economy is to study the financial markets advises Professor Thomas Hazlett in a Chicago Tribune op-ed.

Hazlett offers evidence that investors do not believe the massive debt in the stimulus plans will spur economic growth, as indicated by lackluster results in the bond and stock markets subsequent to passage of the plans. "Many factors move markets, but investors would respond enthusiastically to signs the government was solving the economic crisis," says Hazlett.

While the International Monetary Fund is encouraging nations to adopt stimulus plans that equate to 1.5 percent of gross domestic product (GDP), the Obama plan exceeds 5 percent, and Hazlett questions the administration's fiscal strategy as being "leveraged on a theory that has not scored well in previous runs."

The markets do not believe the 'stimulus,' Chicago Tribune, March 8, 2009. By George Bittlingmayer and Thomas W. Hazlett.

"The 2008 presidential election was a 50-50 contest until mid-September. Then the stock market tanked. The election was over. Democrat Barack Obama became our 44th president.

"A new 'stimulus' plan emerged; in lieu of the $175 billion campaign plan, an $800 billion package was proposed by President-elect Obama and passed by Congress.

"So what is the market saying now? The Dow Jones index-which fell 19 percent from Sept. 2 through Nov. 3-plummeted an additional 15 percent from Election Day through the passage of the 'stimulus' bill on Feb. 12 (and then an additional 11 percent through the rest of February).

"Many factors move markets, but investors would respond enthusiastically to signs the government was solving the economic crisis. Indeed, news that the experienced, moderate Timothy Geithner would be Treasury chief lifted the Dow 6.5 percent Nov. 21 (and an additional 4.9 percent when the choice was confirmed by Obama Nov. 24). Geithner's glow has since dimmed; the Dow dropped 300 points when his Feb. 10 news conference revealed that little progress had been made in crafting a solution to the banking crisis. And today the evidence is that investors do not believe that the massive new debt will spur economic growth.

"Spending is stimulus, the president augurs, but one has to be a true believer to ride the Keynesian test car all the way to a $1.75 trillion 2009 deficit. At 12 percent of gross domestic product, it doubles the previous post-war deficit high, 6 percent in 1983. That was when unemployment topped out at 10.8 percent; the Congressional Budget Office projects the jobless rate to go 'only' to 9.2 percent in this recession. Last summer, President George W. Bush's projected $482 billion deficit was blasted by Democrats as profligate. Team Obama's first month added an increment larger than that entire amount."

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