November 19, 2008
By Brian M. Riedl
Congressional Democrats are now demanding another economic
stimulus package to "inject" as much as $300 billion into the
economy. The package will fail -- just like last year's $333
billion in emergency spending and $150 billion in tax rebates
failed. There's a simple reason why.
Government stimulus bills are based on the idea that feeding new
money into the economy will increase demand, and thus production.
But where does government get this money? Congress doesn't have its
own stash. Every dollar it injects into the economy must first be
taxed or borrowed out of the economy. No new spending power is
created. It's merely redistributed from one group of people to
Of course, advocates of stimulus respond that redistributing
money from "savers" to "spenders" will lead to additional spending.
That assumes that savers store spare cash in their mattresses,
thereby removing it from the economy. In reality, nearly all
Americans either invest their savings (where it finances business
investment) or deposit it in banks (which quickly lend it to others
to spend). The money gets spent whether it is initially consumed or
Governments don't create new purchasing power out of thin air.
If Congress funds new spending with taxes, it is redistributing
existing income. If the money is borrowed from American investors,
those investors will have that much less to invest or to spend in
the private economy. If the money is borrowed from foreigners, the
balance of payments must still balance. That means reducing net
exports through exchange-rate adjustments, thereby leaving net
spending on the economy unchanged.
Yet Congress will soon borrow $300 billion from one group of
people and then give it to another group of people and tell us
we're all wealthier for it.
Lawmakers commit this fallacy repeatedly. They tout unemployment
and food-stamp spending as stimulus without asking where the
programs' funding comes from. They hype a federal bailout of the
states as stimulus, as if having Congress do the taxing and
borrowing instead of state governments makes it a free lunch.
And, especially in this era, when "our crumbling infrastructure"
seems to have become the new mantra, legislators and lobbyists tout
a 2002 Department of Transportation (DOT) study that they believe
proves that every $1 billion spent on highways adds 47,576 new jobs
to the economy.
The problem is that the study doesn't actually make that claim.
It stated that spending $1 billion on highways would require 47,576
workers (or more precisely, would require 26,524 workers, who then
spend their income elsewhere, supporting an additional 21,052
workers). But before the government can spend $1 billion hiring
road builders and purchasing asphalt, it must first tax or borrow
$1 billion from other sectors of the economy, which then lose a
similar number of jobs.
In other words, highway spending merely transfers jobs and
income from one part of the economy to another. As economist Ronald
Utt has explained, "The only way that $1 billion of new highway
spending can create 47,576 new jobs is if the $1 billion appears
out of nowhere as if it were manna from heaven."
The DOT tried to correct this misperception in an April 2008
memo specifying that their analysis refers to "jobs supported by
highway investments, not jobs created" (italics in the original).
The Government Accountability Office and Congressional Research
Service also released studies making the same point.
In reality, economic growth -- the act of producing more goods
and services -- can be accomplished only by making American workers
more productive. Productivity growth requires a motivated and
educated workforce, sufficient levels of capital equipment and
technology, a solid infrastructure, and a legal system and rule of
law sufficient to enforce contracts.
The best measure of a policy's impact on economic growth is
through productivity rates. Lower marginal tax rates encourage
working, saving and investment, all of which increase productivity
(as opposed to tax rebates, which are grants that require no
additional productive efforts). Reforming -- rather than merely
throwing money at -- education and infrastructure will raise future
productivity. These necessary improvements would take time and
shouldn't be considered short-term "stimulus."
It's time for lawmakers to stop futilely trying to wave the
magic wand of short-term "stimulus" spending, which threatens to
push the deficit above $1 trillion. Focusing on productivity will
build a stronger economy over the long run and leave America better
prepared to handle future economic downturns.
M. Riedl is Grover M. Hermann Fellow in Federal Budgetary
Affairs in the Thomas A. Roe Institute for Economic Policy Studies
at The Heritage Foundation.
First Appeared in The Wall Street Journal
Congressional Democrats are now demanding another economic stimulus package to "inject" as much as $300 billion into the economy. The package will fail -- just like last year's $333 billion in emergency spending and $150 billion in tax rebates failed. There's a simple reason why.
Brian M. Riedl
Grover Hermann Fellow in Federal Budgetary Affairs
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