Jan 18, 2009

Will a Fiscal Stimulus Even Work?

That seems to be the question that no one is asking these days. For decades, Milton Friedman and the Chicago School have influenced the economic policies of the United States; growth comes through control of monetary policy and interest rates by the Federal Reserve, and short-term stimulus comes from the lowering of taxes, which (in theory) cause people to spend the extra money through the crunch. That's 'supply-side' economics. Keynesian, 'demand-side' style is apparently vogue in Washington right now, since everyone apparently assumes that hundreds of billions of dollars in spending on infrastructure will 'jump-start' the economy.

The Chicago Tribune says 'no, that won't do it'.

Though findings on demand-side stimuli are arguably vague (since many other factors always play into the equation), the general consensus among most economists (at least the most touted ones) is that governments paying to create new roads and pay states' bills and fund all the little pet projects that Congressmen want won't really help the economy. Beyond the obvious fact that having better roads won't save people from losing their jobs or help them in paying their mortgages (since the money saved from fewer car repairs will certainly not cover the cost of your job and benefits), there is a less-obvious one that is probably more important.

For the government to finance infrastructure spending or tax cuts, it has to borrow money. The money is thus unavailable for private investment or consumption. Right now, companies and individuals are having trouble getting credit, which is a big reason for the downturn. But if the government borrows more, they will have an even harder time finding lenders. So the effort could be self-defeating.

Duh. Does anyone remember where the government's money comes from? Ready, ready? It comes from taxes. It comes from your taxes and the taxes of the businesses. You know, those evil businesses that create jobs for you.

John Kerry very intelligently (what else is new?) said that we need a 'new New Deal.' Mr. Kerry, please take some time with your C-average brain to study some history. The New Deal did not end the Great Depression.

WHAT?!?

That's right, all my fellow public school kids. Contrary to every history textbook peddled before you, the New Deal did not solve the problems of the Depression. In 1940, the year that the War Economy began, unemployment still stood at 14.6%. Remember as well that 14.6% is artificially low, since in the last few months of the year, the government drafted millions of people into the workforce. In the end, the New Deal was more of a morale booster than anything else; it didn't solve the economic woes of the time, but it certainly helped people feel as if they had a purpose. This stimulus, if enacted as the Democrats in Congress want it to be, will have the same effect.

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