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Today's Huge Lesson: The Stimulus Worked, but Keynesianism Failed

Barack Obama
CNBC.com
Barack Obama

You're never going to believe this, but the lead Wall Street Journal editorial today is about how Obama, the Keynesians, and the stimulus all failed.

Don't bother reading it, just skip to the last line: "Maybe now President Obama should consider everything he's done to revive the American economy—and do the opposite."

Clever!

And actually the Journal is onto something: Over 2 years since the Recovery Act was signed, the economy is still really ugly. Today's jobs report, while slightly better than expected, is still really awful.

But that doesn't mean the stimulus failed.

The CBO estimated that it created about 3.3 million jobs. Or maybe it "created or saved" that many jobs, but it clearly had a positive impact on employment, which was the primary goal. Also, GDP resumed growing not long after the stimulus was enacted.

But clearly the stimulus didn't create a lasting or robust recovery, and this is where the Keynesians get it wrong.

See, the traditional argument for stimulus is based on this notion of the "multiplier" effect. You know: The government spends $1 and voila, that turns into $4 in the economy. Sound like magic? That's because it is a myth.

So pumping $787 billion into the economy didn't turn into trillions.

What the stimulus did do was allow for a simultaneous deleveraging of the private sector and growth of GDP, which is actually a pretty neat trick.

So it wasn't enough: The private economy obviously needs a lot more income in order to get back to a semblance of balance sheet normality, and there's no source of that now, so savings rates are shooting up again, as households go back to paying down debt.

This story originally appeared on Business Insider

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