CENTRAL VIEW for Monday, January 11, 2010

Stimulus packages: Why don’t they work?

Questions of the week: Why is the unemployment rate rising to Jimmy Carter-like historic highs? Why aren’t the George W. Bush $167 billion dollar stimulus spending of 2008 and the Barack H. Obama $787 billion dollar stimulus spending of 2009 reducing the unemployment rate? Why does Barack H. Obama think a third stimulus package will do any better than the two stimuli that have already failed?

According to Brian Riedl, a senior policy analyst with the Heritage Foundation: “Government spending does not inject any new money into the economy…. 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.

“Yes, government spending can put under-utilized factories and individuals to work – but only by idling other resources in whatever part of the economy that supplied the funds. If adding $1 billion would create 40,000 jobs in one depressed part of the economy, then losing $1 billion will cost roughly the same number of jobs in whatever part of the economy supplied Washington with the funds. It is a zero-sum transfer regardless of whether the unemployment rate is five percent or 50 percent.”

Previous history should have told both Bush and Obama that government stimulus spending doesn’t work. In the 1930s, FDR’s New Deal doubled government spending. But unemployment stayed above 20-percent until World War II. In the 1990s, Japan’s overheated housing market collapsed, so Japan responded with ten stimulus packages over eight years. None of them worked.

Only cuts in income tax rates have produced positive results. That is because leaving more money in the pockets of every-day Americans results in the savings and investment that are the keys to a growing and prosperous economy.

Economics 101 should teach us that government does not have any money of its own or any way of creating wealth. Government gets money from taxes, from borrowing money and/or from printing money. (Printing too much money causes the inflation that punishes the poor and people on fixed incomes.)

Assigned reading: The Anti-Capitalist Mentality by Ludwig von Mises (1972). In just 112 pages, von Mises demonstrates that savings are the key to the kind of capitalist economy that, to borrow from JFK, “lifts all boats.”

Von Mises teaches that when people have enough money left over after meeting their needs for food, shelter, clothing, education, etc. their savings then provide the capital that investors/entrepreneurs need to build factories, to create jobs, to create the goods that are useful to people. Without savings, capitalism does not work. A government that punishes rather than encouraging savings is a government that ends up punishing ordinary people.

The odd thing about capital is that it can grow wings. For example, it is popular to decry tax havens like the Cayman Islands. Yet tax havens are merely symptoms of a disease one might call: Taxitis Extremis. When capital encounters an unhealthy, punishing tax system, it takes flight and, instead of staying in America to create jobs, it ends up in places like the Cayman Islands.

It is only through the creation of “surplus” that there is the capital required to grow an economy, to have money for the arts, to fund research and development, to deal with environmental issues, to improve health care, and to fund ways (like drilling, along with alternative energy sources) to reduce our dependence on foreign oil.

Mark Steyn’s airline travel tip of the week: During the last hour of your flight. Hold a copy of the Koran on your lap. See if anyone tries to make you put it away. Next flight, do the same thing with the Holy Bible. Compare the two experiences.

Syndicated columnist, William Hamilton, studied at Harvard’s JFK School of Government. Dr. Hamilton is a former assistant professor of political science and history at Nebraska Wesleyan University.

©2010 William Hamilton.

Dr. Hamilton can be contacted at:

Email: william@central-view.com