The Case for No Stimulus

by reader sammy

The Case for No Stimulus

For the last three months, Americans have been treated to a debate over what the government can do to ease the effects of the current recession and bring about a speedy recovery. Lawmakers of both parties are now considering a very large stimulus package.

But there is a catch. Every penny of such a package must be borrowed, because the government is already running a $1.2 trillion deficit this year and faces a $703 billion deficit for next year, according to the non-partisan Congressional Budget Office. The question, then, is whether the government can help the economy by spending money if it can only do so by first sucking that money out of the economy.

An interview with Heritage Foundation’s leading budget analyst Brian Riedl, can be summarized as follows:

1) “Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy….Therefore, again, there is no net increase in aggregate demand. It just means that one group of people has $800 billion less to spend, and the government has $800 billion more to spend.”

2) ” There is this notion that the redistribution of money from savers to spenders creates new spending…….people use their savings to pay down20debts or invest. Or they put it into the bank, who in turn lends it to others to spend. Therefore, savings circulate through the investment side of the economy, which counts just as much in the GDP as the consumption side of the economy..”

3) “The government is going to have to raise interest rates in order to convince people to lend them the full amount they need. We’re already facing a deficit of $1.2 trillion this year, and 700 billion next year. We borrowed $700 billion for TARP, and now we’re going to borrow $800 billion for this stimulus package. Compare those numbers to the entire public debt, which was 5.8 trillion up until a few months ago. It’s going to be very difficult for a global economy, which is already in a recession, to supply the U.S. government with [$3 trillion] in new borrowing…..The government may have to raise interest rates higher and higher and higher in order to persuade people to lend their diminishing savings to the government.

4) “So we’re actually going to pay to induce people not to invest in the economy, to hide their money in government bonds instead. There’s only so much savings to go around in the private economy. Every dollar of savings that government snatches up through borrowing is one dollar of savings less to be invested in businesses that create jobs. It’s one dollar less to expand new technologies. And so there’s a real danger that the economy is going to suffer long-term be cause it’s not going to have the investment capital to create productivity and jobs, because Washington is gobbling up all the savings for their own spending.”

5) “Economic growth depends on productivity growth, and that on whether we’re using some of our money to create jobs, capital and technology that allows the economy to grow in the future. If you believe that the private sector is better at spending money to create investment and productivity than government, then letting individuals keep more of the money they earn, in the long run, will increase the economy’s capacity to produce wealth…. That’s why the government policy right now—borrowing money out of savings and investment and putting it into consumption—will not only be zero sum in the short run, but it will actually reduce our long-run capacity for growth.”

6) “There are some things the government can provide that would actually improve the economy—say, if they build new and badly needed roads, or a new electrical grid that allows us to deliver electricity better and more cheaply. But the benefit of such investments would be years away, would they not? (and) the immediate act of having the government borrow money and hire people—does not necessarily create any jobs…….In the long run, the existence of a strong infrastructure with highways that allow the transport of goods and services, can help the economy grow . . . But in the short run, the act of spending $1 bi llion on highways does not stimulate the economy. The 34,000 highway workers that receive that billion dollars are receiving a billion dollars that had to be borrowed out of the private economy, which in turn lost the same amount of money and thus is able to support fewer jobs for now . . . So when you borrow and spend that money, you’ve just shifted jobs from one part of the economy to the other.”

by reader sammy