April 21, 2009
By Brian M. Riedl
The idea that government "stimulus" spending can lift the United
States out of recession seems straightforward. Government spends
money, demand increases, the economy grows and the recession ends.
Pretty simple! But this theory has one problem: it has never
actually worked anywhere it has been tried.
During the 1930s, New Deal lawmakers doubled federal spending --
and unemployment remained above 20 percent until World War II.
More recently, Japan responded to a 1990 recession by passing 10
"stimulus" bills over eight years. It amassed the largest national
debt in the industrialized world ... and their economy remained
In early 2008, President George W. Bush signed a $168 billion
stimulus bill, and the economy continued its freefall.
What's going on? Why isn't government spending increasing demand
and economic growth? Because the spending theory contains a huge
logical hole: It never asks where the money comes from. Congress
doesn't have a vault of money waiting to be distributed. Therefore,
every dollar Congress "injects" into the economy must first be
taxed or borrowed out of the economy. No new demand is created.
It's merely redistributed from one group of people to another.
Spending advocates respond that redistributing money from
"savers" to "spenders" will lead to additional spending. That
assumes that savers store their savings in their mattresses,
thereby removing it from the economy.
In reality, nearly all Americans either invest their savings
where it finances business investment -- or deposit it in banks --
which quickly lend it to others to spend, or more recently, invest
it in Treasury bills. Therefore, the money is spent by someone
whether it is initially consumed or saved.
Governments, after all, cannot create new demand out of thin air
-- as you can see in these examples:
Every dollar Congress spends must first come from somewhere. So
in the recent "stimulus" bill, Congress merely transferred $800
billion from one group of people to another -- and then told us
we're all wealthier for it.
Take highway spending. Lawmakers tell us every $1 billion in
highway "stimulus" spending creates 34,779 new construction jobs.
But Congress must first borrow that $1 billion out of the private
economy, which then has $1 billion less to spend supporting jobs.
It is a zero-sum transfer of jobs and income from one part of the
economy to another.
Government spending remains popular because people can see the
new jobs it funds. They don't see the jobs lost in the part of the
economy that paid for it.
But consider this: If government spending could guarantee
economic growth, then why stop at $800 billion? Why not borrow and
spend $800 trillion? Shouldn't big government countries like France
and Germany be the wealthiest in the world? And shouldn't Bush's
spending spree have brought economic nirvana? In reality, the
recent $800 billion stimulus bill weakens the economy.
It takes spending power away from families and entrepreneurs and
puts it in the hands of politicians and bureaucrats. It will raise
interest rates, therefore lengthening the recession. And worst of
all, it dumped $9,400 per household of new debt into the laps of
our children and grandchildren.
There is a better way: Reduce government spending and tax rates,
and trust the people to spend their money more efficiently than
politicians and bureaucrats would. Unlike government spending, this
approach actually works. In the early 1980s, it turned the worst
recession in 40 years into the greatest boom.
Brian M. Riedl is Grover M. Hermann
Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute
for Economic Policy Studies at The Heritage Foundation.
First Appeared in The Plain Dealer (Cleveland)
The idea that government "stimulus" spending can lift the United States out of recession seems straightforward. Government spends money, demand increases, the economy grows and the recession ends. Pretty simple! But this theory has one problem: it has never actually worked anywhere it has been tried.
Brian M. Riedl
Grover Hermann Fellow in Federal Budgetary Affairs
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