Government Stimulus: Out of Sight, Out of Mind


The President’s Council of Economic Advisers (CEA) has released its most recent quarterly report on the effects of President Obama’s stimulus plan. Not surprisingly, the CEA praises this monumental Keynesian scheme, crediting the stimulus for saving or creating 3.6 million jobs and increasing the amount of private funds invested in the economy.

What should we make of such claims? We would all do well to remember the wisdom of Frdric Bastiat: shopkeepers are not better off after having their windows broken by hoodlums, just as the victims of theft do not have their economies stimulated by thieves. Sure, the window glazer may earn a higher income, but society as a whole is not better off. The money the shopkeeper had to spend on the replacement window might have been spent on a new suit instead. Now the tailor is out of income. Likewise, a retailer selling the consumer electronics to a thief may earn higher income. The victim who was looted might have spent what was stolen on dance lessons for his daughter.

It is easy to see the visible benefits that flow to some people as the result of a fiscal “stimulus” plan. It is much more difficult to rightly account for the social costs of such spending. What is missing from the CEA’s report is any recognition that economic goods, including factors of production (e.g., capital, labor, land), are scarce even during a recession. There is no admission that the funds spent by the state must come from somewhere.

Government spending can be funded by only three sources: taxes, borrowing, and inflation. Presently, the federal government is trying a mix of all three. Unfortunately, each has negative economic consequences that mitigate any positive benefits reaped by those who get the government money. If government spending is funded by taxes, then the incomes of the taxed (and productive) people decreases accordingly. Taxpayers have less ability to save and invest because their disposable incomes shrink. They also have less incentive to do so, because any future positive returns will be made less due to higher taxes. Government spending funded by borrowing funnels private savings away from productive investment and into wasteful government projects. Government spending funded by monetary inflation will make those who receive the new money better off at the expense of those who receive the new money later or not at all. Why? Because they must pay higher prices without a compensating increase in income.

At best, such Keynesian spending policies merely rob Peter to pay Paul. In fact, due to the stimulus plan, scarce economic goods are being bid away from their most productive uses, so the effect of such government spending is even worse than unhelpful; it is destructive.

We have no reason to believe, consequently, that there has been any net economic benefit from the stimulus plan. Certainly, many people have taken jobs funded by government money. The economic resources used by the recipients of the stimulus money, however, were merely bid away from their most highly valued alternative uses. Government spending does not create more factors of production out of thin air; it merely allows the recipients of subsidies to have an advantage in the market for factors of production. This actually hinders the adjustment process that needs to take place for our economy to get back to sound footing.

It’s no wonder that the employment situation remains so dismal. The official unemployment rate remains quite high and nudged slightly down to 9.5 percent only because large numbers of people left the work force. Only a paltry 85,000 private sector jobs were added last month, and total employment actually fell.

Let us also not forget that work is beneficial only if actually productive, that is, only if it is useful in making something people actually want. If people do a job that is only possible because the state took the money from someone else, this is not productive. This is merely wealth redistribution. What our society needs is wealth-producing jobs – again, jobs making things people actually want, not jobs for jobs’ sake. Very few people were idle, after all, in the Soviet Union. There was a lot of activity. Not all of it was productive, however.

To the extent that there has been any recovery (and this may still be in doubt), and any productive jobs saved or created at all, it is due to an increased saving rate. Only out of real savings can capital be accumulated, and only capital accumulation can put us back on the path toward prosperity.

Reprinted from The Center for Vision & Values.