Stimulus spending is like a perpetual motion machine. Sounds great in theory, but it doesn’t work. Just as machines must use up more power than they output, so too stimulus costs more than it produces.
If stimulus spending really creates jobs and improves the economy, the government could just stimulate the economy all the time and we’ll never have recessions or unemployment. We can achieve perpetual motion through big government! Or so they tell us.
Eighty years ago, Ludwig von Mises wrote:
It is obviously futile to attempt to eliminate unemployment by embarking upon a program of public works that would otherwise not have been undertaken. The necessary resources for such projects must be withdrawn by taxes or loans from the application they would otherwise have found. Unemployment in one industry can, in this way, be mitigated only to the extent that it is increased in another. From whichever side we consider interventionism, it becomes evident that this system leads to a result that its originators and advocates did not intend and that, even from their standpoint, it must appear as a senseless, self-defeating, absurd policy.
It is not just economists like Mises that predict the failure of stimulus projects. History predicts it as well.
Stimulus spending didn’t prevent the Great Depression. It didn’t prevent any recession since then. And I have yet to see proof that stimulus spending produced a net economic benefit when the costs of the government programs were weighed against the economic gains, if there were any at all. Which leads us to one of two conclusions: either (1) stimulus spending cannot work or (2) it can work in theory but government is simply incapable of applying the correct amount of stimulus at the correct time.
In reality, stimulus does have some short-term effect. The “cash for clunkers” program boosted auto sales briefly. The tax credit for home purchases boosted home sales briefly. Construction spending from the Recovery Act did help the economy slightly. The census lifted employment for a few months. But all these programs do is borrow from the future. In the case of “cash for clunkers” and home tax credit, it brought future sales into the present. In the cases of jobs programs and construction projects, the government takes money from the future (debt) and spends it today. That leaves the government with less money in the future and it will either need to reduce future spending or raise taxes, either way harming our economic future.
The Keynesian argument is that this stimulus spending during a recession and cutting back in the future will smooth out the volatility of the economy. First, the government is great at the spending during the recession part, but terrible at cutting back during the recovery. Keynes’ idea was to run a budget deficit during recessions and a surplus during booms. Instead, government runs a deficit during booms and an even larger deficit during recessions. Second, the government has no idea how much to spend on stimulus during a recession and when to cut back on that spending. The government can only guess at how deep the recession will be, when it will start, when it will end, and how strong the recovery will be.
But the government will not let economics or history stand in the way of its grandiose ideas. As Stalin used to say, “We are bound by no laws. There are no fortresses which Bolsheviks cannot storm.”
History has proven that stimulus spending does not work, just as the great economists explained. Yet, time and again voters fall for the same trick and beg our “benevolent leaders” in Washington to take our hard-earned money from us to spend for us.
God willing, voters this November will learn to say NO to Washington and the politicians. “Fool me once, shame on you. Fool me twice, shame on me!” As those great political thinkers from The Who sang, “Won’t Get Fooled Again.”