For the last three months, Americans have been treated to a debate over what the government can do to ease the effects of the current recession and bring about a speedy recovery. Lawmakers of both parties are now considering a very large stimulus package.
But there is a catch. Every penny of such a package must be borrowed, because the government is already running a $1.2 trillion deficit this year and faces a $703 billion deficit for next year, according to the non-partisan Congressional Budget Office. The question, then, is whether the government can help the economy by spending money if it can only do so by first sucking that money out of the economy. It is a question that surprisingly few public voices are expressing.
I spoke Monday with the Heritage Foundation’s leading budget analyst, Brian Riedl, about deficit spending as a silver bullet for ending recessions, and about whether the stimulus package now proposed is necessary or even helpful. [snip]
"That is a great question. The grand Keynesian myth is that you can spend money and thereby increase demand. And it’s a myth because Congress does not have a vault of money to distribute in the economy. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. You’re not creating new demand, you’re just transferring it from one group of people to another.
If Washington borrows the money from domestic lenders, then investment spending falls, dollar for dollar. If they borrow the money from foreigners, say from China, then net exports drop dollar for dollar, because the balance of payments must adjust. Therefore, again, there is no net increase in aggregate demand. It just means that one group of people has $800 billion less to spend, and the government has $800 billion more to spend."
The simple fact is that the only way to create economic growth is to increase productivity. Redistributing money from one group of people to another doesn’t create productivity or economic growth.
" I’m not sure why economists haven’t been pointing this out *. . . For politicians, though, it’s much more understandable. Keynesian economics offers the promise of a free lunch. It offers the idea that government can wave a magic wand, spend money, and make the recession end in a pain-free way.
It’s just not that easy."
[* Because if you point out that the emperor has no clothes, you're labeled as obstructionist and the problem. Highly Recommended > ]
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