Why the “Stimulus” Will Fail

“Those who cannot remember the past are condemned to fulfil it.”

-George Santayana, Life of Reason

    The ultimate objective of any “pump priming” plan is to motivate producers to hire more workers and generate more goods and services. Simply spending a lot of money isn’t the real purpose. Even if they see an increase in sales, employers will only step up production (and employment) if they are reasonably confident that the demand will continue. If they are pessimistic, they will “wait and see” instead of taking the risk of investing in higher capacity, and the extra demand will only result in a price increase. This is especially true of industries that are monopolistic or near-monopolistic (which is most American industries these days). A company with no competition, or a few friendly “rivals”, doesn’t need to worry about its competition stealing an opportunity from it – it can afford to hold off. Both the high degree of monopolism in our economy, and the general pessimism that has reigned since the massive act of naked corruption perpetrated in the form the bank bailout, mitigate against any positive business response to higher demand.

    A stimulus program can only work by putting money into the hands of consumers who will actually spend it on domestic product. Money that winds up in the hands of the wealthy does no good at all; they’re already consuming as much as they want. Money that gets hoarded because of deflation or simply because people fear for their jobs does no good either. Money that is spent on imported goods (meaning almost any goods) mostly helps China, not us.

    What happens to the money the Federal misgovernment spends on construction programs? Well, in the first place, most of it will be balanced by cuts in State spending. The States normally pay for construction themselves, and right now almost all of them are in dire financial straits. Federal construction spending will just allow the recipients to cut back their own construction spending – with the taxpayers of other States picking up the tab instead of their own.

    Out of whatever increase is left, a good bit will be siphoned off by the inevitable corruption of the bureaucracies involved, and then the big contractors will get a healthy cut. None of that money goes into consumption; it goes into the hoards of the rich (who, if they’re wise, will invest it overseas). What about the part that goes to the workers? Well, it keeps the citizens off of unemployment, meaning once again that the States can cut their spending further. The construction industry also employs a large number of illegal aliens, who typically send as much money as they can to Mexico (where a U.S. dollar is still worth something). Of the small portion that does turn into higher consumer spending in the U.S., the bulk will probably go straight to Asia.

    Why would Obama pick such an ineffective economic plan? The construction industry is usually considered a leading economic indicator, but only someone as stupid as an economist would think this meant that the housing slump was the cause of the depression. The housing slump was just one of the early symptoms of a deeper cause (which I may get around to explaining someday). The real reason all the money is going into construction is that it’s an easy way to reward not just states, but cities and counties, very selectively. It’s a simple wealth transfer, from Obama’s political enemies to his supporters. That’s Chicago politics – it has crap to do with national economic recovery.

    A real economic plan would address the underlying causes – but failing that, even a makeshift scheme should take some cognizance of reality. This depression is similar to the Great Depression in many ways, but different in others. The so-called “stimulus” not only ignores the differences, but contradicts the similarities. Consider:

    FDR financed the New Deal largely through very heavy taxation of the very wealthy. He borrowed some money, but not more than the country could afford. Taxation of the rich was a necessary remedy at the time, and it is a necessary remedy now. Obama’s plan is to depend entirely on borrowing and allow the wealthy to continue paying very little taxes. Thus the continual drift in the maldistribution of income is not addressed, and surpluses of investment funds will continue to fuel speculative bubbles.

    The U.S.A. entered the first Great Depression with very little debt and could afford considerable borrowing. We have entered the current depression already carrying a crushing debt load. To continue this colossal spending (and it must be sustained, if it is to have any impact) can only be done by borrowing or printing money, since taxation of anyone but the poor has already been ruled out. With the U.S. government insolvent and hyperinflation looming, it’s doubtful whether borrowing can continue much longer. How fast can the government print money before people stop accepting it as payment? We’ll likely find out soon enough.

    Why does the spending have to be sustained? Because, once again, it’s not enough for consumers to spend money; producers must first sell off all the surplus inventory they have accumulated and then be persuaded that the sales increases will continue for long enough to justify the expenses of bringing production back up to speed. It will be a slow process because each of them will be waiting for the economy to take a definite upward turn before proceeding, yet that upturn will not happen until enough of them have gone ahead on faith. This is one reason the Bush “stimulus” package failed to accomplish anything; everyone knew that any sales increase in April 2008 would be temporary, not something to base business plans on until after it worked – which it plainly couldn’t, with such a small time window.

    Another key difference between this depression and the Great Depression is the nature of international trade. Until the Seventies, America was the world’s great exporter, and had large trade surpluses. The notorious Hawley-Smoot protective tariff was a disastrous mistake because it was the rest of the world that needed protection from cheap American goods – which is certainly no longer the case! The modern American economy needs protection from the impoverished labor of Asia and the Caribbean, if we are to maintain a standard of living higher than theirs. Any economic stimulus that allows the money to flow overseas to nations from whence it will not return, can only succeed in boosting those economies.

    Mr. Obama cultivates the appearance of thinking that history has cast him as Franklin Roosevelt; if he truly believes this, he is sadly mistaken, as he has not one-tenth of the latter’s political courage and has merely continued with business as usual, instead of undertaking radical reform (or any reform at all). He has cast himself as Herbert Hoover.

7 comments on “Why the “Stimulus” Will Fail

  1. J Marshall says:

    mps said ‘Boy, people who live in grass houses should’nt stow thrones. It’s a lot easier to throw rocks through a window that it is to repair a broken one. Got any ideas how to fix this one, or are you just taking cheap shots at the one we all look through, the one that’s already broken? Or put another way, what part of the solution to our problems are you advocating, if any? And if you are not advocating a solution, then what are you talking about? We all know what’s wrong. We need to know how to fix it, so our kids won’t be forced to.
    Big O

    • abgrund says:

      People who live in grass houses should fear lawn mowers, and we don’t all know what’s wrong. In fact I think very few people appreciate the root of the problem. Maybe we can patch things together for a bit with a major war, and I suppose we might, but it’s just another shot of adrenalin to the dying patient. I’ll ‘splain some other time, ‘k? Cuz while the solution is certainly within our reach, it is quite entirely outside our grasp.

  2. Tracy says:

    IF the stimulus had been a payment of credit card debt if the consumer promised not to charge anything in the future, then the stimulus plan may well have had a more direct and positive effect on the habits of the country. I still don’t really understand how an entire economy can run on credit, but we’ve had one that did that did just that, and apparently it is common place around the world. Now that we have maxed out our credit a period of nonspending will have to occur. I’m not sure how the economy will handle this, but hyperinflation seems to be a direct correlation.

    • abgrund says:

      Payment of credit card would accomplish nothing economically, since the whole purpose is to get people spending more money. Anyway, why should the rest of us have to pay for the credit card debts of people who couldn’t control their spending? That would be just as bad as forcing us to pay off houses that idiots bought who couldn’t afford them, which is next on Osama’s agenda – working Americans who can’t afford housing buying McMansions for deadheads.

      The reason why economies run on credit is because our corporate overlord rapists like it that way – it gives them complete control. More about the economics of it some other time. For now, suffice it to say that exactly the same thing caused the first Great Depression.

      Hyperinflation isn’t a consequence of depressions, which rather tend to cause deflation. It’s a consequence of printing money to pay the bills.

  3. Tracy says:

    The credit payment qualifies as “spending money”. The money goes from our hands to the hands of the credit company; an exchange is made for goods previously purchased with accentuated interest.

    Abgrund: you’ve just explained very succinctly why it does not count as spending money. The spending was previous and will contribute exactly zip to employing anyone now.

    If the government is handing out money then it seems to me the most good would be done if the money is given to individual families rather than corporations or infrastructures.

    Abgrund: Back in September I suggested a similar plan that I think would have prevented this breakdown. However, I believe that it is now too late for any kind of mere spending plan to succeed.

  4. Anonymous says:

    ” A stimulus program can only work by putting money into the hands of consumers who will actually spend it on domestic product.” – Abgrund

    Are you suggesting that we buy nothing that is not made in America, from transportation to clothing, even if it means choosing an inferior product? Isn’t the world market now so interrelated that this concept no longer works?

    • abgrund says:

      I didn’t suggest that anyone voluntarily refrain from buying Chinese products. A protective tariff would be good for the U.S. economy, but it would have to be carefully targeted toward nations with low standards of living, which is not how tariffs are ever designed. They are meant to protect specific industries – usually corpulent, inefficient ones that need some competition – not domestic production in general – or even as a way of protecting some other country’s exports for political reasons.

      Opponents of tariffs always forget that the U.S. prospered as a high-tariff nation for more than a century without government spending. Nations that have suffered from their own tariffs have done so because the tariff was poorly designed or because the country was too small or undeveloped to produce many of its requirements domestically. Except for oil and tropical agriculture products, America is capable of producing everything we need within our own borders.

      But it wasn’t my intent to suggest protectionism as the only or the primary solution to our economic crisis. I was pointing out one reason why government spending will not have the same impact that it did in the Thirties. There are other reasons: heavy taxes on the working and middle classes, inflated mortgage payments due to the real estate bubble, tremendous consumer debt, and an overall higher standard of living which allows more discretionary hoarding. All of these things, together with the importation of most consumer goods, reduce the recirculation of money (i.e., the autonomous multiplier).

      If government spending alone would suffice, Mr. Bush’s Iraq Stimulus Plan would certainly have been enough.

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