The Failures of Central Planning

The talk of a second stimulus is beginning to pick up. It should go without saying that I do not support any additional "stimulus" - but, regardless of my views on the pros and cons, the whole debate needs to be viewed from a different perspective. Instead of Republicans and Democrats debating policy, or economists discussing multipliers and the GDP gap, we should focus on the failure of central planning.

Let's back up for a moment... We need to begin the discussion with the role of government. On one extreme there is anarchy. On the other extreme there is dictatorship under a collectivist economy. I have previously described myself as a minarchist. I'll concede to the anarcho-capitalists out there that constructing an intellectually consistent argument for even a small government is difficult without accepting some form of central planning. However, the scope of government in the U.S. (and just about everywhere else) goes well beyond my definition of "small" making the minarchist/anarchist debate a trivial one in this context.

Any government beyond the smallest of governments implies a degree of central planning. Government cannot operate on its own. It must extract the wealth of its citizens via taxes to function. Government expenditures then "re-distribute" that wealth towards services or projects which it deems necessary (i.e. for the common good). Please note, I am not equating all government spending with socialism. But, nearly all forms of government spending do involve wealth redistribution. The general populace supports this activity because they consent to central planning provided it has the check of democracy. Volumes could be written to discuss this, but it is not the focus of this article.

Why do we support central planning? There can only be two logical explanations. First, it may be conceded that the government has more information and employs the best personnel in order to make the best decisions. This may manifest in decisions on how to spend or invest money to stimulate or enhance the economy. Examples include the FED managing interest rates, true Keynesian stimulus spending, and all other programs designed to correct the free market. Central planning may also be supported on the premise that the government can do more for the common good than the free market. This implies that individuals will not support the common good and intervention is required to provide charity and overcome issues such as the tragedy of the commons.

Now let us review the economic stimulus package - the American Recovery and Reinvestment Act. $787 billion has been committed to save the economy and drive investment. There has been more exposure lately that it has failed to deliver on its promises. The premise of the stimulus was that it would create or save jobs. This is a difficult thing to prove, but is generally done by examining actual results versus a preset forecast of what would happen in the absence of the action. This is precisely what both the White House and the independent CBO did to analyze the potential impact of the stimulus.

Let's review this graph which was supplied by Christina Romer and Jared Bernstein - the Chair of the Council of Economic Advisers and the Chief Economist to Joe Biden. This came from a report which was provided before Obama's inauguration in advance support of the stimulus package.
Source: "The Job Impact of the American Recovery and Reinvestment Plan" (linked above) with my own markups

This graph and my notes (click to enlarge the graph) provide only two possible conclusions. Either the administration seriously overestimated the impact of the stimulus or they underestimated the severity of the recession and the impact it would have on unemployment. Their estimates (which were echoed by the CBO and the Democratic Congress) indicated that the stimulus would have shaved one-half percentage point off of unemployment by now. Additionally, they estimated that unemployment would be under 8%. Given that unemployment is well over 9%, the latter estimate can be dismissed as error. So, this implies that their original forecast for unemployment was either way too optimistic or the stimulus has failed having a severe negative effect.

Did our central planners fail to recognize the severity of the recession? Or did they implement a stimulus package which has made the economy much worse than expected? They will tell you that they underestimated the depth of the recession. But, does this really make you feel more comfortable? Should this lead us to place more faith in central planning?

This is not a "blame Obama" missive. Administration after administration, Republicans and Democrats alike, have all failed in their central planning adventures.