Author: impeachobamanow2010
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Conservatives have correctly declared President Obama's $787 billion "stimulus" a flop. In a January report, White House economists predicted the bill would create (not merely save) 3.3 million jobs. Since then, 2.8 million jobs have been lost, pushing unemployment toward 10 percent. Yet few have explained correctly why the stimulus failed. By blaming the slow pace of stimulus spending (even though it's ahead of schedule), many conservatives have accepted the premise that government spending stimulates the economy. Their thinking implies that we should have spent much more by now. History proves otherwise. In 1939, after a doubling of federal spending failed to relieve the Great Depression, Treasury Secretary Henry Morgenthau said that "we have tried spending money. We are spending more than we have ever spent before and it does not work. . . . After eight years of this administration we have just as much unemployment as when we started . . . and an enormous debt to boot!" Japan made the same mistake in the 1990s (building the largest government debt in the industrial world), and the United States is making it today. This repeated failure has nothing to do with the pace or type of spending. Rather, the problem is found in the oft-repeated Keynesian myth that deficit spending "injects new dollars into the economy," thereby increasing demand and spurring economic growth. According to this theory, government spending adds money to the economy, taxes remove money, and the budget deficit represents net new dollars injected. Therefore, it scarcely matters how the dollars are spent. John Maynard Keynes famously asserted that a government program paying people to dig and then refill ditches would provide new income for those workers to spend and circulate through the economy, creating even more jobs and income. Today, lawmakers cling to estimates by Mark Zandi of Economy.com that on average, $1 in new deficit spending expands the economy by roughly $1.50. If that were true, the record $1.6 trillion in deficit spending over the past fiscal year would have already overheated the economy. Yet despite this spending, which is equal to fully 9 percent of GDP, the economy is expected to shrink by at least 3 percent this fiscal year. If the spending constitutes an injection of "new money" into the economy, we may conclude that, without it, the economy would contract 12 percent — hardly a plausible claim. If $1.6 trillion in deficit spending failed to slow the economy's slide, there's no reason to believe that adding $185 billion — the 2009 portion of the stimulus bill — will suddenly do the trick. But if budget deficits of nearly $2 trillion are insufficient stimulus, how much would be enough? $3 trillion? $4 trillion? This is no longer a theoretical exercise. 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. Even during recessions — when total production falls, leaving people with less income to spend — Congress cannot create new demand and income. Any government spending that increases production at factories and puts unemployed individuals to work will be financed by removing funds (and thus idling resources) elsewhere in the economy. This is true whether the unemployment rate is 5 percent or 50 percent. For example, many lawmakers claim that every $1 billion in highway stimulus will create 47,576 new construction jobs. But Congress must first borrow that $1 billion out of the private economy, which will then lose a roughly equivalent number of jobs. As transportation-policy expert Ronald Utt has explained, "the only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven."