Tuesday, November 18, 2008

The Stimulus Package Shell Game

Brian Riedl of the Heritage Foundation had a terrific article in Friday's Wall Street Journal that explains why "stimulus programs" generated by Congress are ultimately futile exercises.

Such programs do not create wealth; they just move it around. As Riedl puts it:

Government stimulus bills are based on the idea that feeding new money into the economy will increase demand, and thus production. But where does government get this money? Congress doesn't have its own stash. Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It's merely redistributed from one group of people to another.

Of course, advocates of stimulus respond that redistributing money from "savers" to "spenders" will lead to additional spending. That assumes that savers store spare cash 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). The money gets spent whether it is initially consumed or saved.

Governments don't create new purchasing power out of thin air. If Congress funds new spending with taxes, it is redistributing existing income. If the money is borrowed from American investors, those investors will have that much less to invest or to spend in the private economy. If the money is borrowed from foreigners, the balance of payments must still balance. That means reducing net exports through exchange-rate adjustments, thereby leaving net spending on the economy unchanged.

Yet Congress will soon borrow $300 billion from one group of people and then give it to another group of people and tell us we're all wealthier for it.
I'm sure if the lame-duck Congress passes a "stimulus" law, many Americans will be grateful for the "windfall" of a three-figure check just in time to pay for their post-Christmas credit-card bills.

But they won't be any richer for it, now or ever.

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