Why the Stimulus has Failed Ohio

By Mary McCleary

It is a generally accepted fact that the stimulus did not work and the supposed “Summer of Recovery” was anything but that. Since the original stimulus package was passed under President George W. Bush, national unemployment has doubled from 4.8 percent to 9.6 percent while Ohio unemployment has risen from 5.6 percent to 10.1 percent. When Congress passed the American Recovery & Reinvestment Act (ARRA) of 2009, President Barack Obama promised unemployment would stay below eight percent, yet unemployment continued to rise.

Both the original stimulus and the ARRA have miserably failed, and the big question is why. Why isn’t all this spending leading to a revitalized economy?

Stimulus spending does nothing to create wealth. It is merely a redistribution of already existing wealth. Sound confusing? Frederic Bastiat, a nineteenth century political economist, illustrates this concept well through his Broken Window Fallacy.

In Bastiat’s example, a child carelessly breaks a store window. The shopkeeper, in turn, must spend money to replace the broken window. Therefore, the shopkeeper stimulates the economy through purchasing a new window, right? Not so fast.

While the window company benefits from the broken window, other people and industries are hurt by the destruction of capital. Due to the broken window, the shopkeeper has less disposable income to spend on other goods and services. He has to purchase a new window instead of spending his money on new business equipment or whatever he chooses. Thus, the shopkeeper is poorer than he previously was, and other industries do not benefit from the shopkeeper’s dollars. No real wealth is created.

How does this tie into all the stimulus spending? Pretend you are the shopkeeper and the government is the child that forces you to spend money. To “stimulate” the economy, the government forces you to give $500 to subsidize a window company. You lose $500 of disposable income, as do the establishments where you would have spent that money. No wealth is created – it is merely redistributed.

When the government stimulates the economy, it doesn’t create wealth. Instead, it merely picks the winners and the losers.

Since March 2000, Ohio has lost 588,600 private sector jobs (second only to Michigan). Of these job losses, 137,000 occurred after ARRA went into effect (Ohio has lost 386,800 jobs since Governor Ted Strickland took over). If “stimulus” spending isn’t helping Ohio reach better days, what will?

* Broad-base tax reform. Ohio has the seventh highest state and local tax burden. High taxes hurt economic growth and give companies an incentive to locate to lower tax states.

* Regulatory reform. Regulations increase the cost of doing business. Just recently, Continental Plastics moved to Indiana to avoid an Ohio regulation costing Toledo over 200 jobs. According to the Toledo Blade, since 2000, about 140 factories have closed in northwest Ohio with a majority relocating to the southern United States. In fact, 20 companies over the last ten years have left Ohio for just Atlanta, Georgia.

* Right-to-work reform. Ohio does not protect a worker’s freedom to choose whether or not to join a union to obtain employment. Over the last 20 years, right-to-work states have added and sustained jobs twice as fast as forced unionization states like Ohio – even after large housing-related job losses in Arizona, Florida, and Nevada. The 15 worst states for job growth since January 1990 are all forced unionization states, while 11 of the 15 top states are right-to-work states.

* Budget reform. Ohio currently faces an estimated $8.4 billion budget deficit. In a state already struggling, raising taxes is not a viable option for recovery. The budget must be realigned to fit the economic conditions of the time. To minimize the effect on our vulnerable populations, the compensation of government workers cannot be taken off the table. If state government worker compensation is realigned to match the private sector, the state could save over $2 billion dollars in the next budget.

As Bastiat and the stimulus have proven, redistributive spending is no way to dig out of an economic hole. While Ohioans have relatively little sway over federal government spending, Ohioans do have an important say in how this state is run. It is time for our leaders to make the tough choices and for the people to hold them accountable when they don’t.

Mary McCleary is a policy analyst at the Buckeye Institute.

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