Stimulating Nonsense
Economies boom when governments remove impediments to production.
Feb 13, 2008— -- The hottest buzzword of the day is "economic stimulus." Virtually every politician and pundit agrees the government must act quickly to forestall a recession by increasing consumer spending. President George W. Bush and the Democratic leadership in the House quickly got together on a $150 billion package that also includes tax incentives for business investment.
The Republican and Democratic presidential contenders back "stimulus" too. (Ron Paul is the exception.)
Any government program that wins the support of the political class and media commentators makes me suspicious.
The economy does seem to be slowing, and there was a net loss of jobs in January. The housing industry is sluggish and the credit market tight because of the subprime-mortgage crisis. So, to "get the economy moving," the anointed experts want the government to quickly put cash in our hands. When we rush out to spend it, the story goes, the economy will get out of the ditch.
Interesting theory, but it's hardly new, and it's been demolished many times before by free-market economists. One problem, which George Mason University economist Russell Roberts observed, is that the money that will allegedly be "injected" into the economy is already in the economy. So how can it be a stimulus?
"The politicians are always going to inject some amount of money into the hands of consumers and into the economy, like a doctor giving a lifesaving blood transfusion," Roberts says. "But where does the economic injection come from? It has to come from inside the system. It's not an outside stimulus like the chest paddles or the transfusion. It means taking money from someone or somewhere inside the system and giving it to someone else."
The federal government is in the red. Bush's new budget has a $400 billion deficit. There's no lockbox with $100 billion in it. So to give everyone a tax rebate, the government will have to borrow more money. But that only moves the cash from one part of the economy to another. As Roberts says, "It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end."
