What is economic stimulus?
- From: honkho@xxxxxxxxx
- Date: Fri, 13 Feb 2009 13:34:41 -0800 (PST)
By John Nofsinger, Ph.D.
I heard President Obama say the other day that "stimulus is spending
money." The president is referring to government spending and is
advocating his economic stimulus bill. Still, it begs the question,
what kind of spending can stimulate the economy?
Most of the spending that government does has no meaningful lasting
impact on the economy. Consider the stimulus bill passed in the Spring
of 2008. Remember getting your $400 check in the mail? The impact of
that was a temporary spike in the economy during the second quarter of
the year. Since then we have lost millions of jobs and the economy has
shrunk.
Why doesn't this work? Consider that a government wants to tax away
money from 15 people and spend that money on hiring a new teacher. The
politicians can say that their new spending of $30,000 has created a
new job and put $30,000 into the economy. However, they ignore the
fact that they took the money from other people who can no longer
spend it themselves. The $30,000 is not new money in the economy; it
is just money that is being spent by the teacher instead of the 15
original owners. Those 15 people were each going to hire a painter to
paint their houses. That painter will no longer have work to do and
will be out of a job. What has happened? The government has just
transferred wealth from some people to others and created work at the
expense of others' work. No net employment or economic growth occurs.
It just shifts who is spending and working. Spending someone else's
money does not provide stimulus.
This story works pretty well for state governments who have to balance
their budgets. However, the US government will be borrowing money to
pay for any stimulus plan. You may ask how that changes the story.
Those investors who are looking for bond investments will be buying
all the Treasury securities that will have to be issued to fund the
plan. But what would those investors buy if the government was not
selling so many bonds? They would have to buy something else, like
corporate bonds.
Corporations issue bonds to invest and expand their businesses. With
this capital, a company can build a factory. The building of that
factory creates many construction jobs. Filling the factory with the
machinery needed to produce the product expands those jobs to the
companies that build the equipment. So this spending creates jobs now.
In addition, infrastructure is created (the factory) that provides for
the ongoing work of the factory jobs. This spending creates jobs now
and the associated expanded business operations maintain jobs into the
future.
This is in contrast to most government spending, which creates
temporary jobs now, but has no follow through into the future...unless
of course, the government borrows more money in a follow-up spending
plan. So in the case of borrowing the money, the government is sucking
up all the capital and spending it. Private enterprise no longer has
access to it and therefore can't spend it. Again, the government has
just changed who is spending the money in the economy and what it is
being spent on.
This leads to the last question: Is the government better able to
determine who should be spending money and what it should be spent on
then those who have the money?
I would argue the answer is "no". If the government could do this
effectively, then the Soviet Union would not have economically
collapsed and the Chinese government wouldn't be promoting capitalism
for the past two decades.
In the end, I must conclude that "stimulus" is not just "spending."
.
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