But Now You Know

The search for truth in human action

Why Stimulus Spending Depresses the Economy


There is a good reason why Bush’s “economic stimulus” plans helped land us in economic depression, and why Obama following that precedent with bigger, badder stimulus plans will do even more harm.

It is the same reason why Japan’s “stimulus plans”, upon which ours were partially based, kept them in an economic depression for a decade, and did the same thing in Sweden.

Here’s How

  • Lost Money: Every penny spent is taken from the private sector: whether through taxes; or by borrowing that robs from private investment, so nothing is gained. Then that money is wasted before it’s spent, because of the cost of bureaucracy, red tape, political motivation, and the lack of any control over the benefit of what it’s spent on.
  • Crowding Out: The government spending competes with private spending, but has no checks or balances, no responsibility, so that it can crush the private competition out of the market, causing more economic harm instead of helping. It hires away workers and managers with large budgets, yet contributes less. It draws away research and investment from the private sector, et cetera.
  • Chilling Effect: Healthy private investment and behavior is seen as punished, as unconditional public spending displaces it. Government spending tends to reward failure, and not to create wealth, while private spending depends upon productivity and success to expand. Bad companies, which do not contribute enough to society to justify their existence, have their ineffective ways perpetuated, instead of being excised and replaced with new competition.

Lost Money

Your Neighbors

1194819_old_windowYour neighbors are planning to upgrade all of their crappy single-pane, wooden windows to nice thermal-pane replacement windows.

(Don’t ask how I know, just work with me, here…)

Your neighbors, therefore, shall cause the full employment of a team of six carpenters/installers, for one week. And those workers will, in turn, use their pay in ways that end up rewarding others, by spending or investing.

Of course they’ll also be profiting the company that sells windows, which in turn will reward its suppliers by ordering more, et cetera.

Your neighbors will, too, have nicer windows. Their house will be more comfortable. They will save money on their energy bills. And, if they are Global Warming True Believers, they will also feel very good about their effort to save the earth.

All of this benefits society and the economy. Even the feel-good parts.

Big Brother

But perhaps your neighbors will be prevented from doing this, by Big Brotherment.

Maybe their taxes are, or will be, high enough that they won’t be able to afford to buy those thermal replacement windows.

Perhaps, in fact, the amount necessary to upgrade their house will, in fact, be spent on a Stimulus Package, funded by their taxes.

That tax money, instead of being spent on their house, will instead filter through the government bureaucracy. The majority of it will actually be paid to bureaucrats, who produce nothing but paperwork and rules.

What’s left, in theory, will go to some union contractors in Iowa, to finance a Corn Museum. Never mind that Corn makes more money for its producers than any other crop, the government is financing this to “stimulate” the economy.

So a team of three union carpenters will get paid for about five days, based on your neighbor’s tax money. Three, because a majority of the money was lost to red tape, and only five days, because the union monopoly dominating the government contract in question is overpaid.

Better still, once their hourly coffee breaks and four mandatory half-hour breaks are deducted, and you take into consideration the bizarre “safety” rules in their contract, that leave them standing around more often than working, what you will actually get is about the amount of work one carpenter’s could do in five days.

And it will be dedicated to building the 23rd corn museum in the United States.

So the options are:

Free Market

  • Your neighbors get a house full of thermal windows.
  • Six carpenters get fully employed for a week.
  • A window company is rewarded for improving the lives of your neighbors.
  • Money is saved on energy.
  • The planet is no longer doomed.

Government Stimulus

  • Iowa gets 0.01% of a corn museum.
  • Three carpenters get employed for five days, to do the work of one carpenter.
  • People may, if the project is ever finished using other people’s tax money, get to save an hour over driving to the privately funded corn museum next door in Illinois.

Now a government bureaucrat will, in defense of his precious Pork budget, say “but we can’t be sure your neighbor will buy thermal replacement windows!”

But, quite frankly, we can be just about 100% certain that they will spend it on something they value. I’m not entirely clear on how even pet rocks and full body massages would be any less of a contribution to the economy than another corn museum.

And, seriously, much of the government’s spending benefits society less than corn museums, too.

Bridges to nowhere, two thousand dollar toilet seats, military equipment the generals said they didn’t want, but some senator insisted on funding because it is built in his state, methadone for junkies that is more addictive and toxic than the heroin it is replacing, free benefits for illegal aliens…

Face it, the corn museum was actually an optimistic example of government benefiting society.

Ultimately, each dollar the government spends must come from a dollar ALREADY taken from your pocket, directly or indirectly. There is no stimulation, because it’s just the same dollar. And, worse, YOU would have bought something you felt was beneficial, not wasted it on some bureaucratic make-work project.

Crowding Out

(caption: Buying stuff on closeout from a bankrupt company helps the economy far more than a government check)

(caption: Buying stuff on closeout from a bankrupt company helps the economy far more than a government check, regardless of whether it saves the bankrupt company)

And let’s not forget that the government’s spending competes with private spending. There is a pressure against private industry, when it’s forced to compete with a government that can forcibly finance a project without any standards for success.

Workers

As noted above, if you are a carpenter, you can get a job where you are paid for what you accomplish, in the private sector, or you can get a job in a government contract where a union monopoly guarantees you more pay, for less work, a coffee break every single hour, and you’re not actually expected to even succeed, or do good work.

With government spending, therefore, one ends up with fewer skilled workers in the private sector.

Research

Better an easy government research job with no results required except regular publication of results, than private sector research, that must actually prove some contribution to society.

This is why things like cancer research and alternative energy research have produced only insanely expensive, ineffective results.

Business

Why build a privately financed corn museum, when there is a public one planned nearby? The free market depends on the pressure of demands, which can be supplied because of the reward of profit, fame, et cetera. All of which is quashed by public competition…producing LESS economic activity, prolonging, or even creating, economic downturn.

Investment

This is even true of investment. Why risk money buying stocks, or investing in any other resource that actually helps create wealth and grow the economy, if the government is issuing trillions in bonds that it can guarantee, at gunpoint, it will be able to afford to pay off?

This is part of why the US stock market is below where it was a dozen years ago; the past nine years of massive growth in government spending have crowded out even investment, depressing economic growth and the availability of money for business and individual use.

Chilling Effect

1164432_carpenter_series_1Capitalism helps society prosper, in part, by requiring that businesses be efficient and useful, or else be displaced by other, better, more efficient competition. Government “stimulus” spending helps bad behaviors and inefficient companies survive, preventing the openings for new, better ways.

Reward Failure

Government spending, too, has to reward failure and punish success, directly. Not just by bailing out failures, but with its own agencies: It would be irresponsible to expand the budget of a project that was already coming in ahead of schedule and under budget. What a waste of taxpayer dollars! Instead, if the agency wants to expand its budget, it must fail. It must show how it is over budget and behind schedule, and how natural this is, how more money and power will help it achieve its goals.

Punish Success

Meanwhile, responsible, productive businesses are punished for their contribution to society.

What if Ford ends up the weakest of the three automakers, because it didn’t take the thirty billion taxpayer dollars and declare bankruptcy? What does this tell companies in other industries, when they’re considering whether to be productive, or else squander money and go crying to the stimulus committees for bailouts?

Government Gangrene

There are hundreds of billion dollars in bad investments, loans, et cetera, that need to simply fail, because they cannot ever be productive. Right now they are gangrene on society’s body, just burdening our health and slowly spreading…but the stimulus/bailout money keeps them from being removed, and even helps them expand, quashing healthy alternatives.

The Solution

In each case, around the world in history, the only way to get out of economic depression was for the government to STOP killing the economy with its fake “stimulus” packages.

Examples

It took Japan and Sweden ten years to figure this out. Some other countries never have, and still are suffering for it.

Even in the US, the government constantly expanded spending to “stimulate” from 1929 through 1938, and only truly enjoyed healthy economic growth when spending and regulation were massively cut in the late forties and fifties.

The opposite of this was the depression of 1920-21, where banks failed, commodity prices plummeted (like housing prices now), the stock market crashed…and the US government did virtually nothing.

That lack of “stimulus” resulted in a depression less than two years long, unlike the decade of the other examples.

Check out the extensive history of economic downturns in the US, for more.

Self-Transfusion?

Ultimately, government spending actually sucks the life out of the economy, increasing and prolonging economic depression, because it must take private money in order to “spend” the public money…as if you gave yourself a blood transfusion by taking blood your left arm and putting it in your right…with the stress of the transfusion actually leaving you weaker than when you started.

July 15, 2009 Posted by | Economy, Politics | , , , , , , , | 14 Comments

   

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