Why the Stimulus Bill Will Not Work

In a recent speech at a Democratic retreat, Barack Obama expressed his frustration at opposition to his stimulus bill when he said “we are not going to get relief by turning back to the vert same policies that for the last eight years doubled the national debt and threw our economy into a tailspin…this is what the best minds tell us needs to be done…Then you get the argument, ‘well this is not a stimulus bill, it’s a spending bill.’ What do you think a stimulus is? That’s the whole point. No, seriously. That’s the point.”

But the truth here is that Obama clearly does not get the point. He correctly blames the policies of the previous administration for getting us into the mess we’re in, but seems inexplicably oblivious to the fact that the practice which created the mess was deficit spending, exactly what he is engaging in with this “stimulus” bill. He seems to think that the cure for the negative consequences of excessive spending is more spending.

Contrary to his other assertion in the speech, the “best minds” do not actually agree with him. Hundreds of them took out an ad in the Wall Street Journal opposing this spending plan. Allan Meltzer, arguably the leading post-Keynesian economist active today, has come out firmly against the stimulus package: “I think this is the introduction to a disaster. We’re going to face a big inflation. Everybody talks about how much we need to do now. But no one talks about how we’re going to unwind what we’re doing now.” Meltzer predicts that the result of Obama’s spending will be a combination of negative economic growth and inflation which was known as “stagflation” in the 1970s.

The economy certainly needs to be stimulated, but as most economists understand, including many on the political left, stimulus will only work if the amount of actual stimulus exceeds the damage done by additional deficit spending, and the very nature of a compromise bill is that it makes trade-offs which reduce the focus of the bill and increase the cost of the bill. Even extreme-left econoclown Paul Krugman acknowledged this result from too much compromise, commenting that the compromises in the bill will “lead to substantially lower employment and substantially more suffering.”

The problem is that Obama’s claim that spending is stimulus is fundamentally incorrect. Government spending is not inherently stimulating to the economy as he suggests because government cannot just create money from nothing without consequences, even if it prints more money or borrows money or engages in deficit spending. The money has to come from somewhere, and the process of getting that money automatically undermines any benefit of spending it. Not 100%, but enough to make a difference.

For the stimulus bill to work, it would have to either provide an enormous amounts of cash-in-pocket to individuals so that the decline in the value of that cash caused by monetary deflation and price inflation would be more than negated, or it would have to cause massive job creation to increase economic productivity to offset the money being spent with growth in GDP and additional tax revenue.

This bill attempts to do both, but does neither well enough.

The number of jobs it creates is estimated at 2.5 million. That’s a generous estimate and they are not long term jobs. But most importantly, they are not enough jobs. Since the recession started we have had 13 straight months of job loss for a net loss of 3.36 million jobs. That means that the bill cannot possibly replace all of those jobs and therefore it will only slow the recession and even that slowing will be offset by the increase in inflation. Job loss will just continue at a lower rate and wages paid for those jobs will be worth less. And then most of the short-term jobs disappear in a year or two.

Tax cuts and welfare benefits and incentive programs of one kind or another really make up a more significant part of the bill than job creation does, totalling close to $600 billion. It’s not really going to be this efficient, but let’s say that this money was just handed out to working citizens for a total of $4000 each per wage earner. Where does that money come from? It either has to come from tax revenue or from deficit spending. If it comes from taxes, all it amounts to is a redistribution of wealth from the top 50% who actually pay taxes to the bottom half who pay little or no taxes. That’s fine as far as helping the most vulnerable citizens out in the short term, but it doesn’t produce any stimulus because it’s just moving money around without growing the economy at all. If the spending is financed by printing or borrowing money it might have more of a stimulating effect, except that whatever you put into the economy this way gets added to the money supply or the deficit, causing inflation and devaluing the currency. That inflation/devaluation effect may lag behind whatever stimulus you create, but will eventually negate it.

So you ask, how much will spending $800 billion of deficit dollars hurt the economy? Well, on the most simple level it’s about 7% of the projected GDP. Theoretically that could translate into about an equivalent percentage of increase in inflation and decrease in the value of the dollar, but it would probably be less because it would be offset by whatever stimulus it actually caused and whatever tax revenue is applied to it. We can already see the effect of deficit spending during the Bush years in the form of a seriously deflated dollar and a significant rise in inflation. The dollar has gone down a lot more than the CPI has gone up, but more spending will just accelerate the process. At a rough guess, taking the already passed bailout and the new stimulus bill into account we’ll see a further 10% drop in the dollar this year and inflation for the year in the 8-10% range, higher than it’s been since the 1970s.

Contrary to the argument made by many Republicans, massive tax cuts aren’t the answer either. They are equivalent in many ways to the kind of social welfare spending the bill already includes a lot of, but directed more at the middle class. The problem with tax cuts is that they are limited to whatever money is being collected in tax revenue, and if you cut taxes that just means that money has to be found somewhere else, which means more deficit spending and printing of bogus money to contribute to the deflationary spiral.

The only answer is to produce economic growth without spending government money. Just creating bogus money and passing it around won’t do the job. Deficit spending caused the crisis and more deficit spending will just make it worse. That’s the problem and it’s easy to identify and President Obama’s speeches and jokes about it can’t change the reality spending is not stimulus when you don’t have the money to spend.

Unfortunately, I don’t have the answer to the problem. I don’t know how to cause spontaneous GDP growth, except perhaps through inspiring consumer confidence so that people will spend money instead of hoarding it as they are currently doing in response to the crisis. Spending a few billion on a propaganda campaign might do more good than this stimulus bill. The only other solution which has been proven to work that immediately comes to mind is to invade, conquer and plunder other nations, and I see that as a really hard sell for Obama.

Dave

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About Dave 536 Articles
Dave Nalle has worked as a magazine editor, a freelance writer, a capitol hill staffer, a game designer and taught college history for many years. He now designs fonts for a living and lives with his family in a small town just outside Austin where he is ex-president of the local Lions Club. He is on the board of the Republican Liberty Caucus and Politics Editor of Blogcritics Magazine. You can find his writings about fonts, art and graphic design at The Scriptorium. He also runs a conspiracy debunking site at IdiotWars.com.

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