Con: Spending won’t turn economy around this year, but tax cuts, federal frugality just might
WASHINGTON — EDITOR’S NOTE: The writer is addressing the question, Will continued federal stimulus spending be needed to end the recession?
The idea that government “stimulus” spending can lift the United States out of recession seems straightforward. Government spends money, demand increases, the economy grows, and the recession ends. Pretty simple! But this theory has one problem: it has never actually worked anywhere it has been tried.
During the 1930s, New Deal lawmakers doubled federal spending—and unemployment remained above 20 percent until World War II.
More recently, Japan responded to a 1990 recession by passing 10 “stimulus” bills over eight years. It amassed the largest national debt in the industrialized world—and their economy remained stagnant.
In early 2008, President Bush signed a $168 billion stimulus bill, and the economy continued its freefall.
What’s going on? Why isn’t government spending increasing demand and economic growth? Because the spending theory contains a huge logical hole: it never asks where the money comes from. Congress doesn’t have a vault of money waiting to be distributed. Therefore, every dollar Congress “injects” into the economy must first be taxed or borrowed out of the economy. No new demand is created. It’s merely redistributed from one group of people to another.
Spending advocates respond that redistributing money from “savers” to “spenders” will lead to additional spending. That assumes that savers store their savings 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, or more recently, invest it in treasury bills. Therefore, the money is spent by someone, whether it is initially consumed or saved.
Governments, after all, cannot create new demand out of thin air—as you can see in these examples:
—If Congress funds new spending with taxes, it simply redistributes existing income.
—If Congress instead borrows the money from American investors, those investors have that much less to invest or to spend in the private economy.
—If Congress borrows the money from foreigners, the balance of payments adjusts by equally reducing net exports, leaving net spending unchanged.
Every dollar Congress spends must first come from somewhere. So in the recent “stimulus” bill, Congress merely transferred $800 billion from one group of people to another—and then told us we’re all wealthier for it.
Take highway spending. Lawmakers tell us every $1 billion in highway “stimulus” spending creates 34,779 new construction jobs. But Congress must first borrow that $1 billion out of the private economy, which then has $1 billion less to spend supporting jobs. It is a zero-sum transfer of jobs and income from one part of the economy to another.
Government spending remains popular because people can see the new jobs it funds. They don’t see the jobs lost in the part of the economy that paid for it.
But consider this: If government spending could guarantee economic growth, then why stop at $800 billion? Why not borrow and spend $800 trillion? Shouldn’t big government countries such as France and Germany be the wealthiest in the world? And shouldn’t President Bush’s spending spree have brought economic nirvana? In reality, the recent $800 billion stimulus bill weakens the economy.
It takes spending power away from families and entrepreneurs and puts it in the hands of politicians and bureaucrats. It will raise interest rates, therefore lengthening the recession. And worst of all, it dumped $9,400 per household of new debt into the laps of our children and grandchildren.
There is a better way: Reduce government spending and tax rates, and trust the people to spend their money more efficiently than politicians and bureaucrats would. Unlike government spending, this approach actually works. In the early 1980s, it turned the worst recession in 40 years into the greatest boom.
Brian Riedl is the Grover M. Hermann Fellow in Federal Budgetary Affairs at The Heritage Foundation. Readers may write to the author in care of The Heritage Foundation, 214 Massachusetts Ave. NE, Washington, D.C. 20002; Web site: www.heritage.org.
Apr 22, 2009 at 7:56 p.m.
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"Actually, I haven't claimed anything...We in fact did spend our way out of WWII"
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Still waiting for cogent explanation on how spending money while in a war gets a country out of it. Money does not fight, people do. I would bet that Japan and Germany also spent money during the war...didn't go so well for them.
Apr 22, 2009 at 2:17 p.m.
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Actually, I haven't claimed anything. I am merely reporting the truth about the past: Such as we spent our way out of the Great Depression and WWII. Sadly, the America haters constantly claim the sky is falling because Obama is president. The sky fell eight years ago and Obama is cleaning up the mess. The party of personal responsibility isn't responsible for anything.
The right wing delusionists strike again. They deny that we spent our way out of WWII and the Great Depression, they said "Deficits Don't Matter", they continue to repeat the lower taxes mantra that a majority of Americans have clearly abandoned.
1. Hyperinflation occurs when you have nothing to back your currency. We have federal lands to back our currency. Also, our dollar is the gold of currencies.
2. Unlike Japan we have a rising population, a consumer based economy, and an entrepeunerial spirit, and aren't xenophobic unless you consider the bigots on this blog.
3. We in fact did spend our way out of WWII and the Great Depression. I realize that this concept is difficult for some right wing liars to grasp.
4. A stable China is a good thing. China buying our bonds is a great investment for China and helps us to stimulate our economy.
5. The left complained about deficits under Reagan and Bush because they're spending was on nuclear missiles, and a fraudulent war. Now we have a President spending American tax dollars on Americans and he is a socialist, communist, tyrant etc. The level of their hypocrisy is staggering.
Apr 22, 2009 at 9:37 a.m.
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Another missed opportunity in making your point and providing facts to back up your statements...good job darwin1! The only consistent thing you have done since posting is not answering questions and side-stepping opportunities to provide facts to back up you silly claims.
Apr 22, 2009 at 8:55 a.m.
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RAF and Darwin1 it's quite entertaining to see you two spar. Sorry, but RAF wins.
Obama will destroy this country. He is inexperienced at governing, unwilling to listen to advice, and has no respect for the citizens hes supposed to be representing.
I say hooray for the conservatives who finally found their voices and turned out for the tea parties. Let's hope those people and more turn out to vote against taxers and spenders in their respective states.
Apr 22, 2009 at 7:43 a.m.
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kiwomohican, your crying about something that hasn't happened and about some "they" that are moving out of California and NY but have NO statistics or facts. All the stupid angry people leaving who want government services but don't want to pay for them? Hip Hip Hooray.
RAF I understand that you lack a bigger picture of how wars are won so it is pretty useless trying to explain something that has been explained several times before. However, you could start your own game show called Win, Lose or Truce but no matter how the contestants answer you won't understand it.
Apr 22, 2009 at 1:14 a.m.
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*banks* not backs..
I can type, really.
Also love being called a right winger, when I don't back either major party, haha. Fun to read the nonsense that many buy into from both of the political spin machines. Then when you have a major melt down, each side goes in full attack mode to blame it on the others policies. One thing I can say for certain is these "meltdowns" biggest cause are GOVERNMENT policy, no matter what side puts them the policies in place.
Apr 22, 2009 at 1:03 a.m.
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The currency will not be the "gold standard" for very long. Wake up and read some of the comments by the IMF, the Chinese (who have said they have grave concerns over our currency). The triple AAA rating of the US dollar is all ready in serious jeopardy. It's all setting up for a major implosion. Just don't say some did not warn you in a few years. I warned people over a year and a half ago that the backs would crash from their reckless leveraging, and the stock market would go right along with it. Believe w/e you wish, I frankly don't care. I personally will do fine regardless, as it's simply a matter of shifting your investments into other currencies before the implosion occurs.
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As far as the "if you don't like it leave" comment. That is indeed what many people in CA, NY, and MI are doing as they get DRILLED with outrageous state taxes. They are simply moving to more tax friendly/business friendly states. The states that the left is in control of are the ones in the most massive debt, and have the highest unemployment. While fiscally conservative states like Texas and Utah are the only ones seeing growth and low unemployment. When the federal government ceases more and more power from the states you won't be able to really "leave" without moving to another country; as the federal blanket will strangle everyone. When s$it really hits the fan, one of these states will simply sussed from the nation, and many like myself will indeed leave. I have no problem at all of going to a place that rewards exceptionalism and entrepreneurship, and limits out of control government.
Apr 21, 2009 at 8:07 p.m.
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You mean like "spending you way out of a war (WWII)"? If you can explain how spending money gets you out of a war, then yes you are indeed the smartest person on earth. Never in printed history has a nation, already embroiled in war, spent money to get out of a war. Once you are in a war there are 3 thing to get you out; win, lose, truce. Money does none of these. Money spent via weapons allows OTHERS to wage battles that get a country out of war...but then you are smarter than me so I am waiting for you to explain during WWII how this happened.
Apr 21, 2009 at 3:53 p.m.
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RAF
Is this what you do to divert attention away from the fact that you don't know what your talking about? Sad.
Apr 21, 2009 at 9:47 a.m.
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So instead of instead of answering any direct questions you perform another "exorcist style" head spin and babble more incoherent thoughts.
Apr 21, 2009 at 8:09 a.m.
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The right wing delusionists strike again. They deny that we spent our way out of WWII and the Great Depression, they said "Deficits Don't Matter", they continue to repeat the lower taxes mantra that a majority of Americans have clearly abandoned.
1. Hyperinflation occurs when you have nothing to back your currency. We have federal lands to back our currency. Also, our dollar is the gold of currencies.
2. Unlike Japan we have a rising population, a consumer based economy, and an entrepeunerial spirit, and aren't xenophobic unless you consider the bigots on this blog.
3. We in fact did spend our way out of WWII and the Great Depression. I realize that this concept is difficult for some right wing liars to grasp.
4. A stable China is a good thing. China buying our bonds is a great investment for China and helps us to stimulate our economy.
5. The left complained about deficits under Reagan and Bush because they're spending was on nuclear missiles, and a fraudulent war. Now we have a President spending American tax dollars on Americans and he is a socialist, communist, tyrant etc. The level of their hypocrisy is staggering.
6. To them I say what they ALWAYS say to us: You don't like it? Then leave.
Apr 21, 2009 at 2:01 a.m.
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All signs point to this spending spree ending in a total melt down that will ultimately end in hyper inflation. That will be the biggest crisis seen down the road.
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It will come as a direct result of President Obama, Congress and the Federal Reserve trying to prevent a much needed recession from running it's course.
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The millions of baby-boomers getting ready to retire and planning to live off of their savings and pensions will soon need to rethink their plans. We are about to see a collapse in the value of the U.S. dollar that will wipe out the wealth of all Americans..
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A few weeks ago, Congress used insignificant AIG bonuses to distract America while the Federal Reserve expanded its balance sheet by $1 trillion in a single day. When the Federal Reserve expands its balance sheet, it is doing nothing more than printing money out of thin air. When the Federal Reserve prints money, everybody with dollars loses their purchasing power.
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$13.1 trillion has already been allocated by the Federal Reserve and U.S. Treasury during the financial crisis for bailouts and stimulus's. Onnly $2.8 trillion has actually been spent so far, but the entire $13.1 trillion will inevitably be spent, and it will be just the tip of the iceberg.
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Our country already has an $11.1 trillion national debt and $55 trillion in unfunded liabilities for social security, medicare and other social programs. Combined with the bailout and stimulus allocations, the U.S. is now in the hole for close to $80 trillion by many estimations.
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I have said it many times..Debt has brought down many great civilizations of the past. Just read some history. The treasury leveraging melt down is happening right in front of us. It took down the banks who were reckless, and it will soon take down the entire US treasury.
Apr 21, 2009 at 1:47 a.m.
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It's rather amusing to hear the left defend this out of control spending. Especially since they were the ones going ballistic NON STOP over the deficits under Reagan and Bush. Deficits that look like pocket change to the TRILLIONS we will be racking up now.
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Most don't even realize that it's China who is financing this debt. A deal that works great for them, NOT because the minuscule interest they collect on their mass purchasing of US bonds, but because of how it props up the dollar so they can demolish us in trade. Which is of course the big reason why manufacturing jobs have vacated this country in mass out sourcing.
Apr 21, 2009 at 1:29 a.m.
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“Your pretty chart doesn't prove anything. It shows an output gap?”
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It provides you with 6 economists (3 for 3 against); in direct response to asking for any economist who believes there is a debate over the great depression. So instead of one name I provided six and you are complaining?
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“You may not like my answer but it is the truth. How hard is it to understand that we built more tanks and guns and planes than Japan and Germany?”
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Again you do not answer the question. A more direct rebuttal to your non-answer is having those (tanks, guns, and planes) does not “get you out of a war” as you previously stated; if we could spend our way out there would be over four hundred thousand US casualties. So again I ask, how do you spend your way out of a war?
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“Only one of the three articles agrees with you maybe you should try reading them.”
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All three support my point that “Some point to the mess the Japan created (modern time) trying to spend their way out of a recession as proof it does not work.” The three articles are sources from places/sites you stated didn’t have any articles on the subject. Your other points on the size of the population don’t matter as we are discussing the outcome of stimulus funding by the government…please try to stay on topic.
Apr 21, 2009 at 12:22 a.m.
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Your pretty chart doesn't prove anything. It shows an output gap? What does that have to do with spending.
You may not like my answer but it is the truth. How hard is it to understand that we built more tanks and guns and planes than Japan and Germany?
Only one of the three articles agrees with you maybe you should try reading them. They also fail to mention Japan's declining population and the other factors I mentioned. You seem to have problems reading the entire post. Either way the historical facts are there, if you wish to corrupt the past I guess that is your choice.
Apr 20, 2009 at 11:33 p.m.
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Name some economists who think this Great Depression issue is a debate?
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http://2.bp.blogspot.com/_b6CLevEGCD0/SW...
Apr 20, 2009 at 11:15 p.m.
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"By building more tanks, guns, planes and bombs then the other side?"
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Nice answer (not sure the question you thought you read), now answer my question. How do you spend your way out of a war? Spending does not get you out of a war...yet you said it does; so I am waiting on your philosophy how SPENDING gets you OUT of a war.
Apr 20, 2009 at 11:12 p.m.
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I can't think of a single article from the WSJ, Economist or the Financial Times that agrees with your assessment of Japan.
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http://online.wsj.com/article/SB12293893...
http://www.economist.com/agenda/displays...
http://www.ft.com/cms/s/0/b166c4ac-11b7-...
These are just a few of many articles…
Apr 20, 2009 at 4:52 p.m.
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How do you spend your way out of a war?
By building more tanks, guns, planes and bombs then the other side?
No, RAF one side represents reality and the other a delusion. Name some economists who think this Great Depression issue is a debate? The only people who think this is a debate are people who are lying to you. Our debt to GDP ratio was 120% what part of that is not spending.
As I have said before Reagan secured our debt in the 80's with wheat. Today we can secure it with Federal lands or whatever you want.
Your Japaneses comparison is not proper. First, the Japanese do not have as many people, are not a consumer based economy, and didn't act fast enough or with enough money to make a difference. I can't think of a single article from the WSJ, Economist or the Financial Times that agrees with your assessment of Japan. If anything Japan is an example of not spending enough.
Apr 20, 2009 at 3:59 p.m.
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$2.2 trillion in tax cuts is not enough? I personally think they ought to expire after two years.
Apr 19, 2009 at 11:29 p.m.
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"did we spend or "cut and run" our way out of WWII and the Great Depression?"
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How do you spend your way out of a war?
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To your point on the great depression there are opinions on both sides; it shortened or extended it (both are guesses), there is no way to truly know without side-by-side comparisons. Some point to the mess the Japan created (modern time) trying to spend their way out of a recession as proof it does not work. Do I believe we spent our way out of it, no. Increasing the debt load removes money from private investment; the debt must be purchased by a buyer unless you print money with out securing it (inflation).
Apr 19, 2009 at 8:51 p.m.
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RAF did we spend or "cut and run" our way out of WWII and the Great Depression?
Apr 18, 2009 at 11:16 p.m.
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"the increases in GDP from the cuts were anemic "
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An increase is better than what was going on. Compaired to today it was an enormous increase. You are right that spending is the problem and always has been. No matter which of the two parties control the purse strings, the nations spending is terrible.
Apr 18, 2009 at 6:50 p.m.
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RetiredAirForce, the increases in GDP from the cuts were anemic compared to the loss of $1.3 trillion in revenue to the government. Neither party is interested in cutting spending unless the other is in power, a vicious cycle. The Republican alternate budget had deficits out to 2080, even with a spending freeze on most of the budget, because of tax cuts. A "do nothing, status quo" budget gets almost $5 trillion in deficits in ten years, only a trillion less than the Republican one. The only thing that saves us is if growth is better than the forecasts. The next few years are going to be difficult no matter which way we go.
Apr 18, 2009 at 5:32 p.m.
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"Mr. Bush cut taxes when he took office, and it took four years for revenue to match Mr. Clinton`s years."
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Taxes were not cut to increase revenue...they were cut to put more money in the economy to offset the decline in the economy (declining increase in GDP); as a result of the tax cuts GDP increased---just as it was intended. Also, a decline in revenue is not a bad thing ( I think it would be great); the problem is those in Washington can never stop increasing how much they spend [the real problem].
Apr 18, 2009 at 5:16 p.m.
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"didn't kiss and hug the enemy and then invade the country the hijackers didn't come from."
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Way to stay on topic again...more dribble
Apr 18, 2009 at 3:58 p.m.
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The only year GDP didn`t rise under FDR was 1938, when he cut spending to ease deficits. The people employed in WPA, CCC, etc. during the depression were still counted as unemployed because of the rules at the time. Even when GDP slumped in 1938, it was still higher than the "boom" year of 1929. Mr. Bush cut taxes when he took office, and it took four years for revenue to match Mr. Clinton`s years.
Apr 18, 2009 at 2:53 p.m.
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During the 1930s, New Deal lawmakers doubled federal spending—and unemployment remained above 20 percent until World War II.
Yes, when we started spending MORE!!! This guy is an idiot.
Yes, rooster good thing Obama didn't kiss and hug the enemy and then invade the country the hijackers didn't come from.
Apr 18, 2009 at 2:16 p.m.
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who cares anymore, we are all screwed anyway. obama is bowing to and shaking hands with our enemies. what does a few trillion dollars of depb have anything to do with anything.
Apr 18, 2009 at 6:53 a.m.
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In my opinion, the most valuable assistance that government could give the economy would be "predictability". More businesses would invest and more consumers would spend if any of us had even the foggiest idea of what they were going to do next in Washington. The whole notion of tweaking the strategy on the fly is a Catch-22.
Apr 18, 2009 at 1:50 a.m.
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Brian talking like that will not make you very popular with the tax and spend crowd.
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