While the various interest groups disagree over what the hundreds of billions should be spent on, they all buy into the superstition that government spending boosts “demand”. In fact, it does no such thing. A year from now, when the “stimulus” has disappeared without a trace and unemployment is higher than it is now, economists will be claiming that the “stimulus” bill was too small, or was spent on the wrong things, or that “consumers saved the money instead of spending it”. Superstition is notoriously impervious to facts.
The definition of “insanity” is, “doing the same thing over and over again, expecting a different result”. Given the failure of “stimulus” everywhere and every time it has been tried (the U.S. in the 1930s, 2001, and 2008, Japan in the 1990s, etc.), Keynesianism is actually a form of insanity. Accordingly, let’s call the belief in stimulus “stimulunacy” and the people who believe in stimulus “stimulunatics”.
As they battle to the death over the specific allocation of the spending (infrastructure, aid to the States, food stamps, tax rebates, etc.) the stimulunatics ignore the one thing that all such plans have in common. The very first step in every “stimulus” program is for the government to go out into the market and sell bonds.
When the government sells bonds, it takes money—and therefore demand—out of the economy. Then, some time later, the government puts the money back into the economy in the form of spending or tax rebates or whatever. Later, when the data becomes available, economists are shocked, shocked to find that “consumers saved their rebates” or “business investment fell by an unexpected amount”, or “imports increased”, thus completely negating the “stimulus”. Their hopes dashed, but their belief in “stimulus” unshaken, the stimulunatics then call for more “stimulus”.
While it is not possible for the Federal government to stimulate “demand”, it is possible to stimulate private business investment. It is private business investment that directly creates both employment and GDP growth.
The most potent way to stimulate private business investment in the U.S. would be to abolish the corporate income tax. Based upon recent CBO numbers, eliminating the entire corporate income tax would cost only about $326 billion the first year. This is less than half of the money that the stimulunatics are planning to pour down their various rat holes this year.
[Link: Real Clear Markets]
Filed under: Economics