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  • Why Big Government Stimulus Fails

    Today the White House will host a Forum on Jobs and Economic Growth featuring such leftist luminaries as Joseph Stiglitz and Paul Krugman. Yesterday The Heritage Foundation hosted House Minority Whip Eric Cantor (R-VA) for a presentation on his common-sense job creation plan. After Cantor spoke, Heritage fellow Brian Riedl explained why President Obama’s $787 billion stimulus, and all the other government stimulus ideas of Stiglitz and Krugman,  failed:

    I’m going to examine why the stimulus failed, and why Congress should instead keep tax rates low and spending restrained in order to allow the economy to create jobs and grow.

    In a January report, White House economists predicted the stimulus bill would create (not merely save) 3.3 million net jobs. Since then, 3.4 million more net jobs have been lost, pushing the unemployment rate above 10 percent.

    This failure of government to spend its way to prosperity is not an isolated incident:

    • During the 1930s, New Deal lawmakers doubled federal spending — and unemployment remained above 20 percent until World War II;
    • Japan responded to a 1990 recession by passing 10 stimulus spending bills over 8 years (building the largest national debt in the industrialized world) – and their economy remained stagnant;
    • In 2001, President Bush responded to a recession by trying to “inject” tax rebates into the economy. The economy did not respond until two years later, when tax rate reductions were implemented;
    • In 2008, President Bush tried to head off the current recession with another round of tax rebates. The recession continued to worsen; and
    • Now, the most recent $787 billion stimulus bill was intended to keep the unemployment rate from exceeding 8 percent. Instead, it now exceeds 10 percent.

    These repeated failures are not an accident. They reflect the myth that government spending is a free lunch. Stimulus advocates assert that government spending injects new dollars into the economy, thereby increasing demand and spurring economic growth. It makes perfect sense under one condition:

    No one asks where the government got the money.

    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. It is merely redistributed from one group of people to another.

    Removing water from one end of a swimming pool and pouring it in the other end will not raise the overall water level – no matter how large the bucket. Similarly, redistributing dollars from one part of the economy to the other will not expand the economy, no matter how much is transferred. Yet that is all the stimulus bill is doing.

    If government injecting $200billion into the economy so far creates 640,000 jobs — as the White House claims – then by the same logic, first removing that $200 billion from the economy must cost about 640,000 jobs

    Spending advocates respond that redistributing money from “savers” to “spenders” will lead to additional spending. That assumes that savers store their savings in their mattresses, thereby removing it from the economy. In reality, nearly all Americans either invest their savings (where it finances business investment) or deposit it in banks (which quickly lend it to others to spend). Therefore, the money is spent whether it is initially consumed or saved. It means all the money government borrowed for the stimulus, would have been spent by the private sector.

    Let’s do the math. If deficit-spending represented “new dollars” in the economy, then the record $1.2 trillion in fiscal year 2009 deficit spending that began in October 2008 – well before the stimulus added $200 billion more – would have already overheated the economy. And if it didn’t there was no reason to believe that adding $200 billion more in 2009 deficit spending from the stimulus bill would suddenly do the trick.

    So what should we do to create growth?

    First, Congress should resist all tax hikes. There is no school of economic thought that would justify raising tax rates in a weak economy. Doing so would reduce incentives to work, save, and invest, and be productive.

    Congress must also rein in runway spending. Last year, federal spending soared to $30,000 per household for the first time ever – up from $21,000 per household (adjusted for inflation) at the beginning of the decade.

    President Obama’s budget would hike spending to $37,000 per household by 2019. It would more than double the national debt. This would raise interest rates, cost taxpayers trillions in net interest spending, and eventually lead to painful tax hikes

    The only way to avoid this fate is to cut spending through four steps:

    • First, do no harm: Resist totally unaffordable expansions of government-health care and energy subsidies. Stop increasing discretionary spending by 8% annually
    • Then, take back unspent Stimulus and TARP money. They haven’t worked, and they are dragging us deeper in debt.
    • Next, enact spending caps. So that lawmakers can better prioritize.
    • Finally and most importantly, reform Social Security and Medicare. This is truly the most important reform, as these programs threaten to bankrupt the federal budget. A good first step would be adding the creation of a Bipartisan Entitlement Commission to the upcoming debt limit vote.

    Let me wrap up by saying that — thanks to the economy’s self-correction mechanism — all recessions eventually end. And we may be moving out of the current recession. But its no thanks to the stimulus bill. We need to focus on building a strong economy recovery, driven by entrepreneurs and families. That means keeping tax rates low, and the government out of the way.

    Posted in Economics [slideshow_deploy]

    9 Responses to Why Big Government Stimulus Fails

    1. Mike says:

      The job market should have been the focus all along. We've wasted time and money trying to rescue Wall Street fat-cats and Corporate goons. People with JOBS buy houses and cars. People without JOBS lose houses and cars (see: http://www.repofinder.com). At least the Government is finally waking up to this. Romney 2012!

    2. Mike, Cleveland,OH. says:

      Amen to all that Mr. Carroll. The math is so easy to understand. Why can't the progressives understand that every penny a US citizen pays in taxes, is a penny they no longer have the freedom and discretion to spend themselves? The gov't now has the money to determine who succeeds instead of a free market. Leave the money in the hands of the person making it. The aggregate result is a "win/win" in the marketplace.

    3. M. Smart, Dallas TX says:

      This is wrong. George Bush’s tax cuts produced a new tidal wave of surplus capital with no place to go except into real estate, where the boom in lending against assets that kept appreciating allowed the “securitization” of mortgages—that is, the conversion of consumer debt into promising investment vehicles.

      There was nothing else to invest in profitable. Alan Greenspan wrote: “intended investment in the United States has been lagging in recent years, judging from the larger share of internal cash flow that has been returned to shareholders, presumably for lack of new investment opportunities.” (Age of Turbulence, p. 387)

      So instead of paying down the national debt, Bush gave a tax cut to the rich and it fueled the housing bubble because there was no other game in town.

      Obama should do whatever Krugman says. Unfortunately, he won't.

    4. Ron Derry NH says:

      There is so little intelligence in Washington.

      If they had spent the last few years learning something about economics instead of berating Bush for 8 years about how stupid he was perhaps they could have come into this situation with some prepared ideas that would help not hinder our recovery.

      Look who is stupid now.

      These Democrats are less than intelligent and are starting to look like Bush was a genius in comparison to their antics. Economics 101, value is created by people setting its worth in the market place. You reduce the worth by taxation and ingratiate the bankers and lenders by printing money for them.

      Obama has Fed the Fed who has fed the lenders who have depleted the countries worth and created a cycle of economic burden by spreading the banking and loan disaster into the wallets of hard working worth stabilizing families so the rich could be sheltered from the looming financial disaster created by printing money and borrowing too much for no good reason or worth building investment.

      This administration is acting like children and getting the results an infant would by letting the FED use Americans like we are a candy store.

      Infantile would be the best way to describe the Obama administration at this point and his loyalties aren't where people thought that is for sure.

    5. Mac, Dallas, TX says:

      I've known for years that government spending doesn't stimulate the economy, but this is by far the most clear and concise explanation I've ever heard.

      As Mr. Carroll describes it, it's so simple to understand, it instantly becomes a truism

    6. Pingback: The Stimulus Was Doomed To Fail « A Voice in the Wilderness

    7. Doug, USA says:

      Big government debt fails in general. This analyst says:


      "Amazingly, our country is making 21st century mistakes as serious as ones leading up to our Civil War. Where are the large cuts to the federal deficit that Obama promised six months ago? The $500 billion structural deficit of a few years ago is now a trillion dollar structural deficit. We are as addicted to debt now as this nation was trapped by slavery back then. In both cases the subsidy of injustice is unsustainable. In both cases the redemption payment will be profound. In both cases President Lincoln’s words in his second Inaugural Address will ring true: “Woe unto the world because of offenses.” "

    8. MLP, Bellingham says:

      As a small business owner, I am not convinced that the Obama administration is concerned about jobs; otherwise, they would not be adding more bsricks onto the small business owners with the health care costs. We will be hit with health care costs that will ultimatley be unprofitable for us and we will not survive.

    9. M. Smart, Dallas TX says:

      to MLP, Bellingham.

      If that really is a problem, instead of whining about it, perhaps you should call your two senators and congressman and tell them they should pass HC legislation that creates single-payer system, aka Medicaire for all.

      If that is adapted, then maybe your small business will be more profitable.

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