Stimulus? We don’t need no stinkin’ stimulus.

(Previously posted with comments, at Redstate.com.  See Author's NOTE below.)

Why another stimulus package would be a mistake

Whether the stimulus package didn’t work, or worked, is still working, worked but then quit working, was too little, too big, needs a second phase, or was juuuust right, is again becoming a matter of discussion among the ruling class.  No, I must amend that.  They are sure that at some level it worked.  For them the only question is how much to expand it and they don’t care much about those other questions.

For us in the country class the questions are more important, because we like to know if and why something works or doesn’t.  You know, so we can decide whether to do it again or not.

I’d like to offer a few ideas and ask some questions about The Stimulus.

What was the stimulus supposed to do?

Jump start the economy, or at least rev it up a little, and “save” jobs and create jobs.

It did none of that very well.  After the appropriation of over $800 billion, with the Administration demanding that it be passed immediately because the situation was dire, official unemployment rates are still at almost ten percent.  A good chunk of it (more than $300 billion) isn’t even in the economy, having not yet been spent for anything.  Forecast economic growth has just been adjusted downward by the Federal Reserve, from over 3% for 2011 to 2.7%.  That estimate is probably optimistic.  But enough of the numbers.

The real point is that a stimulus by definition is a short-term remedy.  It is supposed to work NOW, not next year.  It’s supposed to be, no, it has to be temporary.  If it’s to save jobs, it has to save them NOW.  It can’t be strung out over 2, 3, or 4 years.  Otherwise, it’s just another way for the government to overspend for the Administration’s own pet projects.  Yet, that’s the way the money in this stimulus package has been spent.

There are some requirements for success.

Any stimulus must come from borrowed funds.

No stimulus can work if it has to be paid for by collecting taxes at the same time to replace it.  That is just a game of taking money from one pocket (the taxpayer’s) and putting it in another one (the pockets of favored interests), with a good bit of it taken off the top to pay the bureaucracy.  So a successful stimulus has to be from borrowed funds. Remember this for later.  The idea is that we are borrowing from the future to avert catastrophe now, and we will pay it back after things are stabilized.  We are creating jobs now that will contribute to the growth of GDP now, which helps to repay the borrowed money in the future.  If that isn’t what happens, it doesn’t make sense to borrow the money and pay interest on it.  And the idea of paying for the stimulus by cutting some other program doesn’t make much sense either, even if it moves the spending up from the end of the year to the front.  It’s still moving money between pockets.

Stimulus funds must be spent quickly.

No stimulus can work if the funds that are supposed to be spent are not spent.  In fact, unspent appropriations work against a recovery by creating negative expectations.  They become part of the anticipated debt without contributing to any increase in economic activity.  Public expectation of higher government debt without realization of greater economic activity leads to anticipation of higher future tax collections and/or inflation, which depresses the current economy.

Governments make bad decisions regarding how to spend stimulus money.

They have already prioritized what they thought our taxes were going to be spent on.  Now they’ve appropriated billions of dollar more and they have to decide where to spend it.  The answer ALWAYS is to spend it on the administration’s and Congress’s pet projects:  Green energy projects.  Subsidies paid to individual states to prop up their payrolls, which amounts to subsidies to state employee union members.  Payments to states to cover expenses they can no longer afford, which delays their attempt to solve the underlying problem–excessive spending.  Payments to cities to hire more police or fire or garbage men.  Moving forward purchases of goods and capital improvements that had been planned for later years.  (That one isn’t too bad.  At least we would have something to show for the expenditures.)  The money NEVER goes where a consumer would spend it.

The trouble with these ideas and the others they come up with is that once the stimulus money is gone, they aren’t self-sustaining.  The states and cities still don’t have balanced budgets, corrective changes haven’t been made, and now they have even higher expenses (larger payrolls) and greater deferred obligations (pensions).  Now IF the economy has turned around in a year maybe that’s not too bad, but if it hasn’t it just makes things worse, and the economy is in a downward spiral.

Trusting the country class is the answer.

IF there is a true need to boost the economy, we should keep in mind that we have a consumer economy.  It’s driven by 300 million consumers, and those millions of consumers have more effect on the economy than any one-year infusion of even $600 billion by the government into specific industries, states, or companies.  $600 billion is only $2000 times our 300 million population.  Of course they haven’t even spent $600 billion yet.  Maybe just barely $400 billion.

But–had our government simply given rebates to taxpayers that come to a total of a few hundred billion dollars, the people would have been able to decide where that money would be spent.  It would have stimulated the businesses that the consumers wanted, and ignored the ones they didn’t.  There would be no false support for profligate state or city governments–they’d have to get their own spending under control.  Government worker and teacher unions would face the right questions–do they accept change, or do they accept unemployment?  Cutting edge technology companies would have to convince investors that they were developing a good product, one that people would want to buy.

What’s the theory behind a stimulus?

The theory is that a short-term infusion of a large amount of additional money into our economic system can sustain it past a temporary crisis caused by an anomaly:  The sub-prime mortgage crisis, made either better or worse by TARP funds, leading to the near-collapse of the world financial system and several US financial entities, rising unemployment, the government takeover of two bankrupt car companies primarily at the expense of their creditors, government direction oversight of those financial entities, doubling of the previous annual deficit leading to a runaway increase in the national debt.  Only all that’s clearly not an anomaly.  It’s a whole bagful of mistakes, most of them instigated by government intervention in the economy.  Still, it might be controllable, IF it were just a one-time event.  However, the government’s insertion of itself into the health care industry has guaranteed that deficits will be astronomical by historical standards for the foreseeable future.  Although true-believers might argue that point, sensible people will not.

Our national debt has just reached $13 trillion, while our GDP is in the $14 trillion range.  Debt will soon exceed GDP, perhaps by the end of this year.  For comparison, national debt was less than half that at the end of 2002, and it was less than 60% of GDP.  More interestingly, just one month before the elections in 2008 debt was a full $3 trillion less than it is now.  Debt increased by $4 trillion from January 1, 2003 to October 2008;  it increased almost as much from October 2008 to August 2010–70 months compared to 22 months.  It’s predicted by the Administration to hit $20 trillion within ten years, and it may not take that long.

At this point, anything that increases government debt that isn’t absolutely necessary makes the recovery more remote, the situation worse.  Much worse.  The effect of galloping deficits and mushrooming debt is to destroy confidence in both the government and the economy.  When consumers and producers and employers lose confidence in the economy, they quit buying, cut production, and cease hiring if they aren’t firing.  The only solutions for such deficits and debt levels are Draconian taxes at levels that will kill economic growth, or worse; high inflation as the government monetizes its debt; and/or massive cuts in government spending.  Since massive cuts in spending have never happened in recent history, private expectations are for either or both of the first two alternatives.

Off topic?

Not really.  A stimulus package cannot possibly counter all those negative factors.  The only thing that can is to restore confidence.  In the environment I just described, the single biggest boost to confidence would be delivered by the cancellation of ObamaCare, which won’t happen until Obama leaves office (another boost).  In the meantime, defunding it  would help.  Cut the budget and we cut the need for higher tax receipts.  A good beginning would be to return the unspent stimulus funds back to the Treasury.  Freeze the size of the civilian government workforce, and freeze government pay schedules in place.

If we do that, the future will look better and confidence will start to improve because the government will be displaying fiscal restraint.  The deficit will shrink.  GDP will grow, shrinking it faster.  Eventual inflation will start to look manageable.

And remember what I wrote above–to even have a chance for success a stimulus package must be paid for with borrowed funds.  In this environment, more borrowing would be counterproductive.  The next-to-last thing we need now is for unnecessary expenditures that add to the deficit.  The last thing we need is tax increases that take money out of consumers’ and producers’ pockets for redistribution by bureaucrats.  So no, we don’t need no stinkin’ stimulus.

NOTE:  Some valid points were made by commenters.  A stimulus would work best (if it can work at all) if it came from money "in the bank," rather than borrowing or taxes.  A stimulus has an uphill battle if it follows years of deficit spending--deficit spending is a type of stimulus in itself.  And although it isn't mentioned, ultra-low market interest rates might diminish the stimulative aspect of paying off debt unless the repaid funds are again loaned out quickly--that is not happening today.  Other comments are also informative.