Saturday, February 14, 2009

Why Massive Government Spending Is Ineffective “Stimulus”

Alexandria, Virginia. CFIF. Does massive government spending constitute effective economic “stimulus?”

Liberals say “yes,” conservatives say “no.” Exhausted Americans, who are worried about the economy and saturated in conflicting arguments from both sides, understandably become confused and throw up their hands. This makes it even more important that we understand the relevant economic truths, as well as the instructive real-world historical examples confirming them.

Barack Obama, economically uninformed and obviously confusing his temporary personal approval rating with some sort of permanent mandate to do whatever he pleases, crudely justified his unprecedented spending proposal by grunting, “I won.” Shortly thereafter, Obama rationalized his agenda to House Democrats attending their retreat last week with the following irrational and simplistic attempt at humor:

“So then you get the argument, ‘well, this is not a stimulus bill, this is a spending bill.’ What do you think a stimulus is?! (Laughter and applause.) That’s the whole point! (More laughter and applause.) No, seriously! That’s the point! (More laughter and applause.)”

Clearly unable to defend the indefensible, Obama instead retreats to sarcasm and juvenile humor as if his premise is self-evident. So much for his campaign promise to bring “post-partisanship” and “change.”

But are he and liberal advocates of Keynesian government spending correct?

No, and here’s why.

First and foremost, government spending on “stimulus” necessarily removes money from other uses to which it would be applied in the private economy. After all, every dollar spent by government must germinate from somewhere, whether via taxation, borrowing, printing money out of thin air or some combination thereof.

If it comes from taxation, that merely eliminates a dollar that would have been spent or invested toward other private uses chosen by someone better-informed on how it should be spent.

If it comes from borrowing, it becomes a dollar that cannot be lent to businesses or individuals who could put it toward better use, not to mention that it adds principal and interest to federal debt.

If it is printed from thin air, it thereby creates inflation, thereby robbing us of wealth by devaluing the dollar. In other words, the truism that “there’s no such thing as a free lunch” applies, because these dollars don’t derive from some pot of gold sitting unused at the end of a rainbow.

Second, governmental spending schemes naturally spring wasteful “leaks” into the vast governmental abyss. Stated differently, money evaporates when government transfers it from one source to another, because this requires legions of inefficient bureaucrats and red tape. Economist Arthur Okun labeled this phenomenon the “leaky bucket” principle, and it applies whenever government redistributes money from private sources to uses chosen by Congress.

Third, many beneficiaries of government “stimulus” efforts are simply wasteful by their very nature, and do more harm than good for the economy. For instance, dumping billions of dollars into condom-distribution programs, unworkable wind farms, unnecessary infrastructure projects, school buildings that will sit unused, or on overpriced union labor under Davis-Bacon wage regulations does nothing to help the economy.

Of course, this all sounds correct in theory, but how does it square with real-world experience?

Well, let’s look at the facts.

Governments have attempted massive Keynesian spending efforts like the one proposed by the Obama-Reid-Pelosi triumvirate time after time. Each time, they have failed to cure economic downturns or spark prosperity. In the Great Depression, for instance, Presidents Hoover and Franklin Roosevelt increased federal debt from 16% of gross domestic product (GDP) in 1929 to 44% in 1939. But that unprecedented increase in government spending failed to end the Depression, and only impeded the economy’s ability to correct itself naturally as it had during earlier depressions.

As another example, Japan redistributed enormous amounts of money during its “Lost Decade” toward the same type of infrastructure projects that our current “stimulus” package proposes. Yet, almost 20 years later, Japan remains mired in economic stagnation, and only crippling debt to show for it. And from 1965 to 1980, Americans will recall that the federal government engaged in massive spending and redistribution efforts beginning with President Johnson’s “Great Society.”

Those toxic efforts continued under Presidents Nixon, Ford and Carter, and Nixon himself foolishly said that “we’re all Keynesians now.” Unfortunately, these programs did nothing but increase poverty, waste billions, stall the stock market and create “stagflation” (the combination of inflation and economic stagnation that Keynesian theory considered impossible). From 1965 to 1980, the Dow Jones Industrial Average stalled between 800 and 900 over that long period.

In contrast, Ronald Reagan’s supply-side, market-based principles ended America’s worst recession since the Depression itself. In eight short years, the stock market jumped from 900 to almost 2500, inflation plummeted from 13.5% to 4.1%, unemployment fell from 7.1% to 5.5%, interest rates tumbled from over 20% to under 10%, per capita income jumped from $20,000 to $24,000 and consumer confidence skyrocketed from 74.4 to 116.

This also explains why the stock market crash under Reagan in 1987 did not destroy the healthy economy, whereas Hoover’s and Roosevelt’s government spending and protectionist programs turned the 1929 market crash into a decade-long depression.

Simply put, the laws of economics and real-world experience are clear: market-based, supply-side economic principles bring prosperity, whereas Keynesian government spending programs perpetuate stagnation and waste resources.

Already, Obama has presided over the worst Inauguration Day plummet in stock market history, the worst January in stock market history and saw the market descend almost 5% more when his stimulus plan passed. These economic lessons are apparently about to be learned again.

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