Stimulus fraud
This video is pretty good. The best point is made early, and it's why government stimulus spending never seems to work. The idea is to boost economic demand by giving people money to spend, thus stimulating business activity to end the slump.
One problem is that many people use the money to pay down existing debt, rather than spending it. When times are uncertain, people and businesses get conservative with their money. We saw that with those stimulus checks to individuals a while back, and we've seen it more recently with banks sitting on federal bail-out money rather than lending it out like they were expected to do.
But the more interesting point made in the video is that when the government gives so-called stimulus money to consumers, businesses, or public interest organizations, it does not come from some pile of cash sitting there idle. Government runs at a deficit, so it has no piles of cash. All the money it gives out has to be borrowed. But that borrowed money was also not sitting idle, it was invested in some productive use. When government borrows money, that money is removed from whatever private sector productive use it could otherwise be invested in.
Private sector resource allocation is nearly always much more efficient than government spending. No private lenders are lining up to invest money in GM, for example. So whatever increases in economic activity the infusion government stimulus money MAY produce is more than offset by the loss of other, more productive economic activity in the private sector. The net economic effect of government stimulus spending is therefore less than zero. (The short-run political payoffs, unfortunately, may be highly positive.)
When people speak of the bad effects of government borrowing on the capital markets, this is what they're talking about -- government borrowing that crowds out more efficient and productive users of those resources. The difference is like a hidden tax on the whole society. Even so, it can still be worth it if the government use involves something necessary and not well served by the private market. But by its own stated aims, the "stimulus" Pork-A-Palooza that the Obama Administration currently has on the table fails that test by a mile.
Byron
One problem is that many people use the money to pay down existing debt, rather than spending it. When times are uncertain, people and businesses get conservative with their money. We saw that with those stimulus checks to individuals a while back, and we've seen it more recently with banks sitting on federal bail-out money rather than lending it out like they were expected to do.
But the more interesting point made in the video is that when the government gives so-called stimulus money to consumers, businesses, or public interest organizations, it does not come from some pile of cash sitting there idle. Government runs at a deficit, so it has no piles of cash. All the money it gives out has to be borrowed. But that borrowed money was also not sitting idle, it was invested in some productive use. When government borrows money, that money is removed from whatever private sector productive use it could otherwise be invested in.
Private sector resource allocation is nearly always much more efficient than government spending. No private lenders are lining up to invest money in GM, for example. So whatever increases in economic activity the infusion government stimulus money MAY produce is more than offset by the loss of other, more productive economic activity in the private sector. The net economic effect of government stimulus spending is therefore less than zero. (The short-run political payoffs, unfortunately, may be highly positive.)
When people speak of the bad effects of government borrowing on the capital markets, this is what they're talking about -- government borrowing that crowds out more efficient and productive users of those resources. The difference is like a hidden tax on the whole society. Even so, it can still be worth it if the government use involves something necessary and not well served by the private market. But by its own stated aims, the "stimulus" Pork-A-Palooza that the Obama Administration currently has on the table fails that test by a mile.
Byron
posted by Byron | Saturday, January 31, 2009
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