I’m very skeptical of government sponsored “stimulus packages”. There are a number of inconsistencies underlying them, and they have a miserable track record at achieving their desired results. But right now we’re in a financial panic. In our politicians’ minds critical thinking and examination of the results of previous stimulus efforts are subordinate to the need to DO SOMETHING, NOW.
We’ll set aside the fact that for Obama’s stimulus package (which he tells us needs to be passed NOW) the vast majority of spending will not even happen this year. We shall also set aside the fact that hundreds of billions of dollars of the proposed package are going to welfare of some sort and cannot by any stretch of the imagination cause lasting economic growth.
I’m really puzzled by the assumptions lurking beneath a stimulus package proposal. The idea is that our government can print money and through deficit spending allocate it to a variety of programs, with lasting economic growth somehow resulting. This is classic Keynesian economics and it has been tried in a variety of nations and circumstances, never with the desired result ensuing. Keynesian economics does however have the appeal of “something for nothing” and politicians who want to be seen as proactive cannot resist the promises of stimulus packages.
Economic growth is caused by solving / improving problems. The industrial revolution caused economic growth by freeing up labor. The horse and carriage, railroads, automobiles, and airplanes all caused economic growth by improving transportation options. The computer automated countless tasks and freed up considerable mental effort. The internet caused economic growth by improving the transfer of information. The theme is that to get economic growth, to improve the standard of living, things need to improve. The catch of course is that it is difficult to improve things.
Government stimulus packages do not improve things. People who advocate stimulus plans suffer from “magical thinking“:
According to psychologist James Alcock, “‘Magical thinking’ is the interpreting of two closely occurring events as though one caused the other, without any concern for the causal link.
Having more wealth is a consequence of economic growth. Stimulus advocates take the consequence of growth to be the cause of growth. In essence they confuse cause and effect. In their minds more money spent implies more wealth. As a result any amount of money spent on anything should cause economic growth. Money for artists that no one likes, money for STD prevention, money for bridges to nowhere- it doesn’t matter to them as funding is equivalent to growth. Quoting our President:
Ratcheting up the sarcasm, the president said: “So then you get the argument, ‘well, this is not a stimulus bill, this is a spending bill.’ What do you think a stimulus is?”
“That’s the whole point,” he said, as the audience hooted and applauded.
Our President suffers from an acute case of magical thinking. In his book any government spending will cause net economic growth. I’ll accept that in a package ~ $1T in magnitude SOME lasting economic growth will be stimulated. But the question is not will SOME economic growth be stimulated but will the NET effect be economic growth? All of this spending has to be financed somehow, and the funds will be taken from people who given the choice would allocate their capital differently.
stimulus packages: just another attempt at turning lead into gold
The basic premise underlying all government stimulus packages is that government is somehow more efficient at allocating resources (i.e. capital) than individuals. Stimulus packages are the distilled quintessence of SOCIALISM. Socialism everywhere it has been tried has had miserable results at stimulating growth (academics don’t even debate this, but some say the economic stagnation was a worthwhile trade-off for other more ephemeral benefits). But somehow this time socialism is going to work and it is allegedly going to save us all.
I’m not the only one skeptical of stimulus attempts. The Congressional Budget Office concludes that Obama’s stimulus plan will hurt the economy more than doing nothing.
The beauty of capitalism is that as a politician you don’t have to do anything. You just remove constraints and let people solve their own problems. Grant people the freedom to allocate their resources as they see fit. The downside to this is that voters who want to have their cake and eat it too will hold you as a politician responsible for solving their economic problems. Capitalism is not perfect (nothing is) but just like the laws of thermodynamics you will not do any better.
Our Congress is on the verge of making a grave mistake, one that our children and grandchildren will be paying for.