Top 10 reasons to oppose the stimulus
Bookworm on Feb 06 2009 at 11:48 am | Filed under: Economics
You know that I almost never print other posts in their entirety here, because I think the author of a good post deserves the linky-love of people clicking over to check things out. I’m breaking my rule here by reprinting in its entirety Matt Kibbe’s list of Top 10 Reasons to Oppose the Stimulus, which appears at Freedom Works. What he says is too important (too neat, too pithy, too targeted, too easily absorbable) to hide in a link with the hope that people will click over. Please read this and email it to your friends. (And do click the Freedom Works link, above, because linky-love does matter.)
As with medicine, the first rule of law making should be first, do no harm. The “stimulus” bill fails this test spectacularly. Among so many other reasons to tell your U.S. Representative and Senators in Washington to oppose the stimulus, the Top 10 are:
The Stimulus Will Not Work
Our history is replete with examples of “stimulus” spending failing to move our economy toward prosperity—Bush just tried it, Ford tried it. Even Christina Romer, Obama’s Chair of the Council of Economic Advisers agrees. Romer wrote in a study, “Our estimates suggest that fiscal actions contributed only moderately to recoveries.” The New Deal didn’t end the Great Depression and Obama’s stimulus package won’t end this recession. In fact, two UCLA economists published a study in 2004 finding FDR’s similar New Deal policies prolonged the Great Depression by seven years.
It fails because you don’t increase economic output by taking a dollar from one person and giving to another. The idea of “stimulus” spending falls for the “ broken window fallacy”—the allure of what is seen versus what is not seen. We will see the jobs created by the government spending. What we won’t see are the jobs lost because consumers have less money to spend because the government got the money its spending from us—the only place it can get money.
The Stimulus follows the same plan that ruined Japan’s economy
Japan, after a dramatic market crash and a drop in real estate prices responded with government spending not unlike what the US Congress is considering today. In fact, they had 10 stimulus bills between 1992 and 2000, spending billions on infrastructure construction, building bridges, roads, and airports as well as pouring money into biotech and telecommunications. While many countries enjoyed booming economies and falling unemployment during this time, Japan had a lost decade, seeing its unemployment more than double. They spent double the US level of GDP on infrastructure, and now have a lousy economy and have one of the highest national debts in the world.
After 10 stimulus packages, Japan has gone from having the second biggest economy in the world by a long shot, to being well behind the new number two, China, and is close to falling behind India. We do not want to follow their lead.
The Stimulus is full of Wasteful Projects
While we were told the stimulus bill would focus on rebuilding America’s infrastructure—mainly the roads and bridges—only 5% of the current bill goes to such projects. The rest of the bill goes to pet projects like:
- $400,000,000.00 for researching sexually transmitted diseases
- $200,000,000.00 to force the military to buy environmentally-friendly electric cars
- $34,000,000.00 to renovate the Department of Commerce headquarters
- $75,000,000.00 for a program to end smoking which, if successful will bankrupt the State Children’s Health Program Democrats are about to pass (SCHIP) that is paid for by cigarette taxes
- $650,000,000.00 for digital TV coupons
- $50,000,000.00 for the National Endowment for the Arts
These programs are just the 2008 version of the “ midnight basketball” program that derailed Bill Clinton’s attempt to ram through a “stimulus” bill in 1992. Despite that bill failing, the economy quickly recovered and the economic boom of the 1990s began.
The Government Can’t Afford the Stimulus
President Bush pushed the government deep into a $1.2 trillion deficit this year, the third time he has set a record for biggest deficit ever, and President Obama’s stimulus bill follows his lead, piling on more debt. The deficit in 2008 amounted to about 8 percent of GDP. The entire debt is about 35 percent of GDP.
Even for those who do still believe in Keynesianism, it is important to remember his theory didn’t start with the government already over a trillion dollars in the hole, he was generally operating from balanced budgets.
We Can’t afford the Stimulus
How much is $825 billion? The Heritage Foundation has calculated that that comes to over $10,000 per American family. To further put that in context, on average, families annually spend:
- $2,230 on apparel and services
- $3,595 on health care
- $4,322 on food at home
- $11,657 on shelter
The Stimulus is Bigger Than the Economic Output of Most Countries
If this bill were a country, it’d be the 15th largest country in world, ranking between Australia and Mexico. It is bigger than the economies of Saudi Arabia and Iran combined. In fact, the $875 billion it calls for is more than all the cash in the United States.
Central Planning like the Stimulus Doesn’t Work, Ask the USSR
If centrally planned government spending on a grand scale produced economic growth, the Soviet Union would have won the Cold War. If government spending on a grand scale produced economic growth we would be in the middle of the Bush Boom right now. It doesn’t. Working, saving, and investing leads to economic output and increases in productivity lead to growth.
As economics professor Steven Horwitz said, “The stimulus plans assume consumption is the source of growth. It is not. It is the consequence of said growth.”
Remember the $750 Billion Bailout from this Fall?
It was just a couple months ago when we were told if we would just quickly hand over $750 billion to the Treasury Secretary to bailout his friends on Wall Street, he would make the economy all better. That didn’t work, and neither will an additional $825 billion.
This Money Doesn’t Grow on Trees
And this has nothing to do with paper money being made of cotton and linen. The only way the government gets money is through taxing, borrowing, or printing—that is, it has to take it out of the economy in order to put it back into the economy. If government borrows the money for the stimulus, then it will either have to print money later or raise taxes to pay it back. If it raises taxes to pay for the stimulus, it will, in effect, be robbing Peter to pay Paul – probably with interest. If it prints the money, inflation decreases the value of the dollar for every American – robbing Paul to pay Paul.
Economists do NOT Agree this is a Good Idea
No matter how many times supporters of the bill say it, economists do not all agree this bill is a good idea. In fact, hundreds of economists have come out against it, including Noble Laureates, who signed a letter the Cato Institute ran as a full page ad in several major newspapers opposing the stimulus. Still more economists submitted statements to the US House of Representatives opposing the stimulus proposal.
And this only scratches the surface, there are so many more reasons to oppose the stimulus.
Related posts:
- Fun facts about the stimulus plan
- Fiscally responsible Democrats
- Reports of economy’s death were greatly exaggerated
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I think that Jonah Goldberg made an absolutely brilliant point in his article “The Great Overreach” at
http://article.nationalreview.com/?q=OGUwZjlkZWE1YWNkYmVjMzQ4YTI4ZWRmMDhlODVhMmU=
Money quote:
“Remember what passes for a “cut” in Washington. Any decrease in the rate of increase counts as reduced spending. If you spend 20 percent more this year than you did last year, that’s a spending increase. But next year, that additional 20 percent is part of the baseline. And if your budget grows by “only” an additional ten percent, you’ve just “drastically cut” spending!
The stimulus bill was designed to give Democrats maximum maneuvering room. It would increase non-defense discretionary spending by more than 80 percent in a single year, in a single bill! Moving forward, they could grow government by smaller percentages while seeming to be responsible budget balancers. By putting chips on every square of social spending, they could let it ride for years to come.”
“By putting chips on every square of social spending, they could let it ride for years to come.” Wow. Just what we need — more entitled interest groups squabbling for pieces of a shrinking economic pie.
I would add that when you define spending this way, the deficit growth goes exponential. Debt service (in the numerator) becomes impossible relative to GDP growth, typically about 4% to 6% (denominator). As Herbert Stein famously observed, things that can’t go on forever, won’t.
Since national debt and leverage ratios are at all time highs, there are logically only three ways to resolve the financial problem:
1) Grow our way out (unlikely given exponential debt service),
2) Default on the debt (off the table),
3) Inflate our way out.
Let’s take each option in turn and work through the possibilities.
The stimulus will not add to economic growth, for all the reasons so ably enumerated by Matt Kibbes, not even by the CBO’s own estimate. The mathematics of exponential debt in the numerator are against it. Cross off option number one.
The government is moving mountains in a (futile) effort to avoid default (which would make the Great Depression look like a picnic). The second option of avoiding default is an illusory solution, but we’ll try it. The consequences will be increased political interference, higher taxes, zombie firms, and economic sclerosis. Covered in Kibbes’ list by #1,2, and 9 above.
That leaves option three. Everyone knows that we’re trying to inflate our way out. It will work until it won’t, only because at the moment there is no viable alternative to the dollar as a reserve currency.
The likely sequence: present situation, deflation, counterproductive stimulus, slow growth, stagflation, dollar crisis, ????
The dollar’s status as reserve currency will last as long as China continues to provide us with vendor financing. However, the relationship is symbiotic because they need us for exports, capital, and technology. So how we do depends largely on China. The problem is that China is not stable:
http://newledger.com/2009/02/its-not-just-generals-who-fight-the-last-war/
Peter Thiel wrote about it from another angle, how it all comes down to globalization and China at:
http://www.hoover.org/publications/policyreview/14801241.html
(Personally, I think that India is equally if not more important than China to the US. It is young and growing, and enjoys the anglosphere tradition of law and markets; whereas China is a fascist state, and may grow old before it gets rich. The Bush administration’s move to a closer relationship with India was a geopolitical masterstroke.)
Which is yet another reason to fear the stimulus — it contains the seeds of protectionism. Its provisions to give more power to the unions will make protectionism more likely. Why is protectionism so bad? Well, aside from the obvious historical precedent of Smoot-Hawley, finance has been described as nothing more than a demographic transfer of old people lending their savings to young people, who make investments. The declining numbers of young people in the industrial world (Japan, Europe, US) during the past generation are reflected in shrinking investment opportunities. We NEED vibrant and growing foreign markets and consumers. (Do I hear India and Brazil?)
The stimulus will increase government borrowing to the extent that private investment in the world’s capital markets will be crowded out. If protectionism doesn’t sink those markets, crowding out will.
The other option to crowding out is to simply print money. Getting the sequence right is tricky, but again, all roads seem to lead to inflation.
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