Wednesday, January 28, 2009

The "Stimulus" is an Abomination of Rational Thought

The House is set to vote today on the now infamous "stimulus" bill. Yesterday, President Obama cruised down the block to make his pitch to Congress. He pleaded to "keep politics to a minimum." Unfortunately, the President has it backwards. The "stimulus" bill is maximum politics - it is logic and reason that are kept to an absolute minimum.

Has the President, or any Congressman for that matter, even attempted to put forth a rational argument as to how the "stimulus" will actually accomplish its stated mission of stimulating the economy? Of course there have been claims as to what the results will be: According to Congressional Budget Office Director Doug Elmendorf the “stimulus” will provide a substantial boost to the economy - an increase of GDP between 1.2 and 3.5 percent by Q42010 and a boost in employment of between 1.2 and 3.6 million jobs. President Obama said that the American people "want us to put together a recovery package that puts people back to work." He cited recent announcements by companies like Caterpillar and Home Depot regarding job cuts nearing 100,000. But there has been nary a whisper about how increasing government spending has even the chance of achieving that.

The reason for the silence is simple: There is no plausible explanation. As Thomas Sowell stated, "Facts are the only real antidote to a seductive vision." And the fact is that the government cannot create economic growth by spending money. If it could, then there would be no reason to limit the size and scope of the “stimulus”. The seduction lies in a simple equation to calculate GDP which includes G (government spending) as one of its terms. Increase G on one side, and GDP must increase on the other. The logic flaw is that G must be increased at the expense of the other terms. A dollar spent by the government is a dollar less to be spent or invested by the people. Private investment will fall more than government spending will increase. Further, “stimulus” proponents are expecting some kind of Keynesian multiplier effect that simply does not exist (both empirically and logically). The last 100 years can be examined, and there will be no evidence to support the irrational theory that increased government spending leads to economic growth and job creation. Common sense will tell the same thing.

Not that such a link has even really been attempted. The President and a majority in Congress are simply expecting the people to go along with it. They are playing on fear, on the assumption that something must be done. They make no pretense that the people deserve at least a cursory explanation of just how economic growth will be spurred. The reality is that the “stimulus” bill is an excuse bill. As in, the economy is being used as an excuse to push a particular agenda. White House Chief of Staff Rahm Emanuel at least had the decency to express this view by referring to the crisis as “an opportunity to do the things you couldn’t do before.” Would the people normally tolerate a massive increase in government spending on an unprecedented scale? A debate about the desired size and role of government would be welcome – that would be an honest discussion. To claim, however, that an increase in government spending and economic growth go hand in hand is mind-bogglingly ridiculous.

A member of Congress who votes in favor of the stimulus is saying one of two things: “I have abandoned all sense of rational thought” or “I am using the current economic woes as a guise to ludicrously increase government spending.” Voting in favor of the “stimulus” is simply irresponsible and signals a departure from any sense of obligation to represent the people. The Constitution compels the government to promote the general welfare of the people. The “stimulus” does the opposite.

As always, an entry that is critical of the “stimulus” should include an alternative. There is only one way the government can stimulate the economy to grow and create jobs (empirically and logically): reduce taxes and spending. A pure flat tax which eliminates the taxation on investment (capital gains, dividends, and interest) will spur economic growth and job creation the instant it is signed into law.


Anonymous said...

dave- as hit the nail on the head, in your first paragraph and last 4 lines!!!
What the people might have to do is hit obama in the head

Anonymous Unwed Mother said...

I believe that you are 100% correct - although as a democrat I think I may travel down a slightly different path to get to the same opinion that you have about the stimulus plan - but in any case multiple times while reading your post I nodded my head in affirmation with a silent "AMEN!" running through my mind.
Okay - here is the thing. I can see the flat tax. I believe that a solid argument can be made for the existence of a flat tax - although there are certain parts of my brain that believe that a flat tax would still offer numerous loopholes for people to get around. But what we need is for policymakers to take ideas such as a flat tax and open and honestly dissect them in an intellectual conversation with the American public.
Am I too much of an optimist/idealist to believe that at this point – opposing ideas should spark dialogue and debate and compromise – as we all have a common interest in securing out nation – don’t we?
I would love to be able to see the pros and the cons of a flat tax proposal - just as I would LOVE the policymakers to be having a conversation about the pros and the cons of this harebrained stimulus bill with the American public.
I think it was wonderful for Obama to reach across the aisle yesterday and have what was noted as a "real conversation" with republicans on this bill - but why wouldn't the rest of us be privy to this conversation?
Such conversations are not openly discussed because when you get right down to it - the stimulus plan in any shape or form - the way the republicans would like to see it or the way the democrats would like to see it - is not the answer to what is plaguing the financial system and what scares me – is that I am starting to believe our so called “best and brightest” are throwing all this money at the markets because they have no idea what else to do.

Warren Mosler said...

this is ridiculous. government policy is overly restrictive and running larger deficits will remove that restriction and allow the economy to return to higher levels of output and employment.

alway has and always will, both in theory and in practice.

Warren Mosler

Anonymous said...


Anonymous said...

so true