Why The Stimulus Failed

For the last two years, and especially since last Fall, the struggling economy has been the most pressing issue facing the nation.  A number of efforts have been undertaken to revive the economy, but with unemployment at 9.5% and rising, and no sign of economic recovery on the horizon, nothing seems to have worked. 

The most public and most colossal effort yet undertaken was by the federal government in the form of the American Recovery and Reinvestment Act of 2009—the so-called “Stimulus Plan”—passed in February at the insistence of President Barack Obama. The Stimulus Plan, totaling $787 billion, was sold to the American public as essential to protect the economy from further trouble.  According to the president last February, “This is not your ordinary, run-of-the-mill recession.”  It’s “the worst economic crisis since the Great Depression.” 

Why was such a stimulus necessary?  The principal underlying the Stimulus Plan is derived from the work of British economist John Maynard Keynes. Keynes asserted that in an economic downturn, when the private sector is unwilling to spend or invest, government should step in and spend in order to keep the economy afloat until private sector spending recovers.

The trouble with Keynes’s formula is that the government is not a producer of wealth or value. All the money the government has it acquires through taxes, borrowing or printing. 

Therefore, when the federal government spends $100, it takes $100 from the private economy.  When the government raises $100 in taxes, it is $100 less that a private person or entity has to save, invest, hire, build, or otherwise dispose of.  If the government chooses instead to borrow that $100, that money is not being invested in other capital markets. When the government instead chooses to print $100, it inflates the currency.  For every extra dollar the government prints, every other dollar in circulation depreciates in its purchasing power—the value of each individual dollar is diluted.  Inflating the currency is in effect a tax, as the government takes value away from the dollars held by private parties.

Because government can only spend by taking from the private economy, Keynesian stimuli focused on government spending have never worked.  In this country, we have had two runs of the Keynesian experiment, both of which predictably ended in disaster. 

During the 1930s, Presidents Hoover and Roosevelt massively increased the level of spending by the federal government. The effort was a failure. Roosevelt’s Treasury Secretary, Henry Morgenthau admitted in 1939, “We are spending more money than we have ever spent before and it does not work.  I want to see this country prosperous.  I want to see people get jobs.  We have never made good on our promises.  I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot.” 

The second Keynesian experiment was tried during the 1970s, during which President Nixon declared, “We are all Keynesians now.”  The result was again a

disaster, culminating in the creation of the Misery Index, the combination of the inflation and unemployment rates.

Why then are many in Congress and the Administration insistent that we walk down this path again?  The answer is not

about economic recovery, but about power.  Left to its own devices, any free market economy will recover from trouble.  We only need look to our own history.  The American economy has suffered a number of setbacks and has always recovered without resorting to massive intervention by the federal government (see the recession of the early 1890’s, 1920’s and 1980’s). 

But an economy recovering on its own is no way for a politician to increase his power or reward favored constituencies.  Under the intellectual cover provided by Mr. Keynes, politicians will tax and spend.  In the name of aiding economic recovery, politicians will take from the private, productive economy and give that money in exchange for votes.  The effect of this is to keep unemployment high and dependence on the federal government for largess higher still. 

The Stimulus Plan is not and never was about recovery, but about control by the government over individuals.  The government will happily take from you what is yours and give to another in exchange for that person’s vote.  But that largess will not effectively create jobs or produce wealth.  And maybe that is the point in the end.  When individuals have jobs and can rely on their own friends and families in times of need, they don’t need politicians—and politicians will always do everything they can to remain needed.  Mr. Keynes has given those politicians their excuse.

-Edward Mahee from TruPolitics.net