By Hao Li: Subscribe to Hao's RSS feed
August 24, 2010 10:11 PM EDT
Between the bailouts, the 2009 stimulus package, and other programs intended to support and stimulate the economy, the U.S. government has spent $3 trillion in response to the financial crisis and Great Recession, according to CNN's bailout tracker.
Yet after all that money, the unemployment rate remains near 10 percent by government estimates and over 20 percent by some private research/estimates. The GDP only grew 1.6 percent in second quarter 2010, 3.7 percent in first quarter 2010 and 5 percent in fourth quarter 2009. These growth rates are weak coming out of such a severe recession, especially compared to other U.S. post-WWII recoveries and given the sheer scope of the government stimulus.
Of course, some argue that things could have been worse. But they could definitely be a lot better, too.
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One reason for the ineffectiveness of stimulus packages is “stimulus leakage”, said Andy Xie in an op-ed in the Chinese newspaper, Caixin. (Xie is an independent economist and the former chief Asia-Pacific economist for Morgan Stanley.)
Stimulus leakage happens when the benefits of stimulus “leaks” out of the country enacting the stimulus. In the U.S., some of the benefits of the government stimulus – such as job creation and GDP growth – have leaked to the emerging market economies.
U.S. stimulus creates demand in the U.S. economy. Governments spend money directly. Through tax cuts and benefits like unemployment insurance, the private sector also spends more, although hoarding and de-leveraging has hampered private spending during the Great Recession.
In a closed economy, domestic businesses would meet that demand. Eventually, they would need to hire more workers, which lowers the unemployment rate. Consumer confidence, and consumer spending along with it, returns. The economic recovery then becomes self-sustaining.
However, because of globalization, the flow of trade and foreign direct investments, some U.S. demand is met by foreign countries -- and these nations then reap the benefits of employment, growth, and self-sustaining recovery.
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