Diary

One politician gets why "stimulus packages" do not stimulate growth.

The EU discusses whether or not to promote a Keynsian-economics fiscal package similar to the ones we have had hoisted on us. German Chancellor Angela Merkel cuts to the core of the issue by calling this “cheap money.” and noting it will take the EU right down the same cycle of repeated “bailouts” we are now facing.

Her argument demonstrates the core issue that Milton Friedman leveled on deficit-inducing packages and has been repeated by Blackhedd and others (including myself) here. That is, money directed by such practices does not encourage spending at all. Rather it typically gets treated as a “rainy day fund” and gets essentially taken out of circulation–the worst fate possible in an economic downturn.The reason for this is people do not spend money just because they have it. They spend on needs, and then they deal with discretionary income according to self-interest. That is, it’s rooted in human nature. And much of economics (in terms of spending/saving issues, at least) is nothing if not the study of self-interest. If a person is not convinced that they will have a job in 6 months, or their current job situation is not adequate for their concerns, then rather than spend the money, they will save it. And they will save it by essentially stuffing it in the mattress. The money will not get used in the economy, because they have no confidence in the economy. And in terms of growing a national economy, money going into the mattress is the last thing you want.

Historically, these stimulus packages have been one of the ways we created stagflation. Inflation due to deficit spending is a given. More money will be printed to cover the short-term costs of the packages incurred, that will increase inflation and reduce the value of the currency. But it’s an unavoidable side-effect that Keynes even admitted in these applications. But, what Keynes was wrong about, was that such spending would incur more spending. Since it does not, but rather merely reshuffles the economic debt, thus producing economic stagnation as well, you get the before-Keynes unheard of phenomenon of stagflation. As an axiom (not an absolute), Government cannot produce wealth. It can only redistribute wealth. And these stimulus packages never produce wealth. They simply shuffle it from one sector of the economy to another.

The Obama tax plan, btw also represents an economic disaster of this sort.. The fact that he is backing off this is ironically encouraging news. His “tax cut” actually would function in real economic terms as a tax increase on the economy. Temporary shifts that scale function the same in economic terms as a marginal tax rate increase. So the money gets saved on the anticipation (again) of a future economic hardship. This is also why Bush’s stimulus failed.

The best solution to an economic downturn is long-term reinvestment and encouragement of productivity in the workplace. That is, in simplest terms, a long-term reduction in tax rates, coupled with incentives towards reinvestment in the economy. The Auto Industry is being hammered in no small part right now because they languish in a state with one of the highest corporate tax rates in the country. But they are not addressing that issue. Or the issue of their over-priced labor forcing them to sell cars for $1000 less than Toyota USA. Instead, we are being called on to pay for their mergers in a program that would do nothing but cause us to repeat the failure.

Already we are being told the bank stimulus didn’t work…and another round of mortgage crisis looms. The banks, typically, did what ordinary Americans did with their “stimulus” money. They pocketed it, or gave it to their shareholders in a desperate bid to have the backing to stay in business. Loans are still essentially frozen, foreclosures still far above normal. This is not the first go-around with Detroit, nor will it be the last. Nor was it the first time we’ve dealt with the banks. Bailouts are bad economics. Stimulus packages do NOT stimulate. Insisting we keep trying them is repeating a bad idea in search of a different result (aka: insanity).