Sunday, February 1, 2009

Oppose the Stimulus

Oppose the “Stimulus”

Before I state why we need to collectively oppose the stimulus let me first allow that the concept of a stimulus is legitimate. If we have high yield public projects to invest in that will generate more income than the cost to borrow for the project than it is a stimulus. For example imagine that my town of Waxahachie is isolated from the rest of Texas. It is a recession. The federal government allocates money to individual states for infrastructure projects that pass a cost benefits test (unlike this proposed bill which has no such test as of yet). Texas decides to build a highway that connects Waxahachie to Dallas. The amount of income, productivity, and increased commerce that is generated from the road more than pays for itself over the course of time and so the investment was a stimulus for the economy. When the job is over the demand for construction will be higher than it was before leading to some of the government supported work force to head for the private sector construction jobs and the rest of that work force to find a job in the recently booming private sector. Now let’s look at a proposal that wouldn’t work.

Pretend now that the federal government wants to stimulate the economy by buying $250 million dollars of chairs for their workers. Let’s assume that the inventory of chairs is so low that the government’s purchase would result in more than a wiping out of existing inventories, it would require firms to produce more. So as a result the mahogany wood farm hires more workers to 1) plant more trees, and 2) harvest more wood. Carpenters hire unemployed people to help them build the chairs. Sounds like a positive so far – idle resources (seeds, workers) are put to work and the velocity of money increases. The next year after the stimulus those extra wood harvesters and carpenters return to their idle status (aka got the pink slip) because aggregate demand has shifted left. The government’s solution of a stimulus was only temporary and all that is left is 1) debt and 2) $250 million dollars worth of chairs. The chairs, per se, do not generate revenue or improve the economy, they only devalue the currency and/or increase the national debt. The previously unemployed workers are back at square one and might even be worse off. Even if we assume that the carpenters, wood harvesters and their employers spent the money they received from the government, and that a trickle down effect and again an increase in the velocity of money occurs, some of that money would a) spent on goods which have a cost to produce so the trickle down truly is a trickle and b) any money spent by the carpenters, wood harvesters and their employees will distort the market. Obviously the carpenter execs and the mahogany wood execs realize that the government money is only a one time expenditure. But when they spend their government checks the goods sellers do not realize that this is also a onetime expenditure. Imagine if they spent $200 million on Dodge Vipers. The brilliant folks at Chrysler might increase production of the viper and could also end up bankrupt the next year. Let’s apply this logic to our current stimulus package HT: Peter Klein (

  • $1 billion for Amtrak
  • $2 billion for child-care subsidies
  • $50 million for the National Endowment for the Arts
  • $400 million for global-warming research
  • $2.4 billion for carbon-capture demonstration projects
  • $650 million for digital TV conversion coupons
  • $8 billion for renewable energy funding
  • $6 billion for mass transit
  • $600 million for the federal government to buy new cars
  • $7 billion for modernizing federal buildings and facilities (including $150 million for the Smithsonian)
  • $252 billion is for income-transfer payments ($81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don’t pay income tax)
  • $66 billion for education

Add to this the anti-free trade provisions in the package which will likely result in a tariff/imports war, and higher taxes and where are we? 1934. What made the great recession the great depression? Higher marginal tax rates, increased inefficient regulation, anti-free trade laws, and massive wasteful government spending.

Perhaps the most insulting part of this is that this increase in spending is likely to be permanent. Government spending has increased higher than inflation since 1934. I have two examples that illustrate why this happens. Sugar subsidies cost the American consumer .07 dollars a year (7 cents!). I don’t know about you but I’m not going to write a letter to Joe Barton (my rep) about 7 cents. But those 7 cents add up to a 2 billion dollar subsidy to the sugar industry. Another example is guns. Gun manufacturers, workers, and users all have more motivation to lobby on behalf of their position, more-so than the average citizen who might not want guns on the street but isn’t monetarily, or personally, in the felt. That is why the NRA spends millions of dollars lobbying Congress each year but anti-gun advocates spend only thousands. You have here a collective action problem due to diffuse costs and concentrated benefits. Every time the government increases spending you create additional concentrated benefits and diffused costs. The tax payer simply is at a political and strategic disadvantage.

I’ll conclude with two points. First, the man who used to be known as Larry Summers was on Meet the Press last week and had this to say about the whether or not we should extend the Bush tax cuts, “First, it's a bad idea because we simply can't afford it. The president's inherited a trillion-dollar deficit, and a deficit with a baseline that is terrible as far as the eye can see. We've got to spend money now while we have a recession, while we've got this serious economic crisis, but as soon as the economy recovers we are going to have to find ways of getting the government's finances under some kind of control.” So according to Dr. Summers we can afford to have government bureaucrats and politicians allocate money that we’re going to borrow but we can’t afford $300 billion of tax cuts to entrepreneurs and business owners (aka the upper-middle class and the movers and shakers of the economy). This comes down to whether or not you trust our government to allocate resources better than the private sector (and baked into this is the questionable deflationary trap problem). I don’t. Lastly if this is a targeted (it isn’t) and timely stimulus then why is 71.4% of the money going to be spent after one calendar year when we might already be in a recovery? Even a true Keynesian would balk at that. Maybe we’d be better off just having the government buy us all a bottle of Scotch, after all, this is about animal spirits right?


eking said...

There is an alternative, although few people know about it. The Republican Study Committee introduced their own Economic Recovery Act.

More info:

Ben L. Kemer said...

I would like to know if any thought or money was given to the idea of having some maglev trains and nuclear power introduced into America. It could go some way into helping our economy be up to pace, and more eco-friendly, when the recession closes.