De-Stimulator

If you read just one anti-stimulous essay this week, you should read this one by Brian Riedl: Why The Stimulous Failed

The idea that increased deficit spending can cure recessions has been tested, and it has failed. If growing the economy were as simple as expanding government spending and deficits, then Italy, France, and Germany would be the global economic kings. And there would be no reason to stop at $787 billion: Congress could guarantee unlimited prosperity by endlessly borrowing and spending trillions of dollars.

The simple reason government spending fails to end recessions is that Congress does not have a vault of money waiting to be distributed. Every dollar Congress “injects” into the economy must first be taxed or borrowed out of the economy. No new income, and therefore no new demand, is created. They are merely redistributed from one group of people to another. Congress cannot create new purchasing power out of thin air.

This is intuitively clear in the case of funding new spending with new taxes. Yet funding new spending with new borrowing is also pure redistribution, since the investors who lend Washington the money will have that much less to invest in the economy. The fact that borrowed funds (unlike taxes) must later be repaid by the government makes them no less of a zero-sum transfer today.

The crazy thing is that the February stimulous was sold to the public with the explicit promise that - if it were passed, immediately - the unemployment rate would not go above 8%. Today, the rate is nearing 10% with big states like California and Michigan at 12% and 15%, respectively. Not only that, it is generally understood that the stimulous was not directed at any particular direction, but was simply a grab-bag of liberal spending projects. And yet, everyone is smiling and talking about how the stimulous was a big success, even though 90% of the money hasn't been spent yet. Huh? It makes no sense, but the guys on TV keep reassuring us that things are going great.

It has long been this way. Even members of the GOP, supposedly the "business" party, succomb to the demands for stimulous. Anti-stimulous arguments should be as basic to conservative politicking as arguments in favor of 2nd amendment rights, but they are not. This is a major source of weakness, but that's what we get for making everyone master the intracasies of Roe v Wade, rather than read some Hayek or Sowell (which frankly doesn't take that long).

If conservatives wish to provide economic leadership, they must get this argument right. The stimulus is not failing because it is too small or because too much of it is being saved. It’s failing because Congress can only redistribute existing demand, not create new demand. This recession will eventually end. The more serious, long-term danger is that President Obama’s Europeanization of the economy will bring the same slow growth, stagnant wages, job losses, high taxes, and lack of competitiveness that have plagued Western Europe, leaving the United States at an ever-growing disadvantage with Asian countries not so afflicted.

To prevent this, conservatives and free marketeers will need to promote policies that support long-term prosperity. The first step will be articulating why big government does not bring economic growth.

Easier said than done. A big problem is that our political system is incapable of debating an econmic issue such as the efficacy of government stimulous. Few Americans - whether voters or politicians - are able to join the debate because they have simply never received any sort of education in the pros and cons of stimulous spending. It's very easy to get through college (forget high school) without encountering anything except the shallowest of economic ideas. (The only reason I was familiar at all with John Maynard Keynes was because I was a literature major, and Keynes was part of the "Bloomsbury Set." This instantly lowered Keynes in my eyes). Simply saying the word "Keynsian" is tantamount to ceding the rhetorical ground to the less educated, like Rep. Pete Stark, who believes that "the more debt we owe, the weathier we are." A disturbing attitude, but one that is obviously believed by most of the political class on both sides of the aisle, although only the Left have made this part of their ideology.

The other problem is this: the decision to engage in a bout of stimulous spending is not an economic question; it is a political one. And it is a question that is usually resolved in favor of the guy who can yell the loudest (Ted Kennedy was often the Democrat's pointman on this sort of thing. Who will take his place?). Passing a stimulous bill is a part of the US Recession Ritual, as are complaints that "we haven't done enough." The people pushing the stimulous always make a great show of Doing Something, which also gives them a chance to beat up their opponents as Uncaring and Beholden to the Old Way of Doing Things. When the economy (inevitably) picks up again, they can stand around and take credit without anyone ever wondering if (1) the government spending had anything to do with the economy's revival and (2) whether the economy would be in a stronger position if we hadn't taken on so much public debt. Nice work if you can get it.

It seems to make a sort of elemental sense that - if there is an economic downturn - the government can pick up the slack by spending a ton of cash, hiring a bunch of people, and building a bunch of ... stuff: dams, bridges, highways, ACORN headquarters, whatever. It's the sort of off-hand comment you tend to hear at bars; the gov't ought to do something, and before you know it, Ted Kennedy is standing on the floor of the Senate waving his fists and turning purple, and yelling that "we must get America back to work!" (Yes, what will we do without the Lion of the Senate?). It literally does not occur to most people to even begin to wonder where the taxes and public debt funding government stimulous is coming from.

That's how things have gone since the 1930's when American politics developed a taste for massive deficit spending. Money shuffles from hither and yon with favored constituencies funded by the Forgotten Man - America's productive workers - who is then left wondering why he can't get ahead.