Wednesday, September 09, 2009

Robbing Peter To Stimulate Paul

Good piece by Brian Riedl in the Septenber 7th edition of National Review reminds conservatives that rather that criticizing the stimulus package for its size or timing, they should focus on the fact that the entire premise behind government spending stimulating economic growth is inherently flawed (sub req):

This is no longer a theoretical exercise. The idea that increased deficit spending can cure recessions has been tested, and it has failed. If growing the economy were as simple as expanding government spending and deficits, then Italy, France, and Germany would be the global economic kings. And there would be no reason to stop at $787 billion: Congress could guarantee unlimited prosperity by endlessly borrowing and spending trillions of dollars.

The simple reason government spending fails to end recessions is that Congress does not have a vault of money waiting to be distributed. Every dollar Congress "injects" into the economy must first be taxed or borrowed out of the economy. No new income, and therefore no new demand, is created. They are merely redistributed from one group of people to another. Congress cannot create new purchasing power out of thin air.

This is intuitively clear in the case of funding new spending with new taxes. Yet funding new spending with new borrowing is also pure redistribution, since the investors who lend Washington the money will have that much less to invest in the economy. The fact that borrowed funds (unlike taxes) must later be repaid by the government makes them no less of a zero-sum transfer today.

Even during recessions--when total production falls, leaving people with less income to spend--Congress cannot create new demand and income. Any government spending that increases production at factories and puts unemployed individuals to work will be financed by removing funds (and thus idling resources) elsewhere in the economy. This is true whether the unemployment rate is 5 percent or 50 percent.

For example, many lawmakers claim that every $1 billion in highway stimulus will create 47,576 new construction jobs. But Congress must first borrow that $1 billion out of the private economy, which will then lose a roughly equivalent number of jobs. As transportation-policy expert Ronald Utt has explained, "the only way that $1 billion of new highway spending can create 47,576 new jobs is if the $1 billion appears out of nowhere as if it were manna from heaven." Removing water from one end of a swimming pool and dumping it in the other end will not raise the overall water level. Similarly, moving dollars from one part of the economy to the other will not expand the economy. Not even in the short run.

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