Why Government Spending Does Not Stimulate Economic Growth: Answering the Critics

Wall Street Journal ^ | 01/08/10 | BRIAN M. RIEDL

[coaltrain]

Proponents of President Barack Obama's $787 billion stimulus bill continue to insist that the massive government bailout played a decisive role in moving the economy out of the recession. Yet assuming no destructive government actions, the economy's self-correction mechanism was widely expected to move the economy out of recession in 2009 anyway. With a parade of "stimulus" bills the past two years (going back to President George W. Bush's tax rebate in early 2008), it was entirely predictable that some would link the expected end of the recession to whichever stimulus bill happened to come last.

...President Obama's stimulus bill failed by its own standards. In a January 2009 report, White House economists predicted that the stimulus bill would create (not merely save) 3.3 million net jobs by 2010. Since then, 3.5 million more net jobs have been lost, pushing the unemployment rate above 10 percent. The fact that government failed to spend its way to prosperity is not an isolated incident:

{snip}

Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.[7]

Congress cannot create new purchasing power out of thin air. If it funds new spending with taxes, it is simply redistributing existing purchasing power (while decreasing incentives to produce income and output). If Congress instead borrows the money from domestic investors, those investors will have that much less to invest or to spend in the private economy. If they borrow the money from foreigners, the balance of payments will adjust by equally raising net imports, leaving total demand and output unchanged. Every dollar Congress spends must first come from somewhere else.

[coaltrain]

Long, but good read.

[Bean Counter]

[Graybeard58]

House economists predicted that the stimulus bill would create (not merely save) 3.3 million net jobs by 2010. Since then, 3.5 million more net jobs have been lost,

My math tells me they were off by 6.8 million jobs.

[omega4179]

Must read article. And sad, because Washington will do the opposite.

[Lonesome in Massachussets]

Congress does not have a vault of money waiting to be distributed.

Even it they did (and they could create such a vault by turning on the printing presses) injecting fiat (or any other kind of money) into the economy would be inflationary and would crowd out other uses of resources. Essentially, inflation is a tax on anyone dumb enough to hold dollar demoninated obligations, like government bonds. That's how Lyndon Johnson tried to pay for the Vietnam War. How did that work out for you?

[CodeToad]

We have 80 million families in the US with 34 million collecting food stamps. We DO HAVE soup lines, they are just electronic payments instead of actual lines in the street.

Several years ago we had 154 million taxpaying income earners. Today, we have 109 million tax paying income earners. 45 million people are no longer working. Unemployed, stop seeking employment, stopped working by decision, call it whatever you want but 45 million less people are working today. That is 29% of the previous workers no longer working.

[conservatism_IS_compassion]

Long, but good read.

Bookmarked.

[uncbob]

Depends on the kind of spending

WWII spending sure did

[mulligan]

Government is a parasite and a destroyer. It steals money from working people, the taxpayers, and shuffles it in such a way as to line the pockets of it’s friends, or in simple terms, other parasites and destroyers.

[WOBBLY BOB]

“with my mind on my money and money on my mind, gotta keep the money presses runnin overtime”
- Grandmaster Flashbammy

[WOBBLY BOB]

“I like big deficits, I cannot lie...”
-Sir Spendsalot