Just like Keynesian economics, electroshock therapy was first introduced in the 1930s and then gained widespread use in the 1940s. Now President-elect Barack Obama “anxious to jolt the economy back to life” is considering a federal stimulus package that could reach a whopping $1 trillion. Now that is a shocking number.
Problem is, there is just no academic or real world evidence to suggest such a massive ’shock’ would be healthy for the U.S. economy. In the 1990s, Japan rapidly increased government spending in an effort to recover from its economic downturn, but this led to slow groth, low industrial production, and a decline in the overall standard of living. Studies by the Congressional Research Service, the Government Accountability Office, and the Congressional Budget Office have concluded that the impact of transportation spending on jobs would be much less than anticipated—in fact highway construction could even have a negative impact on the economy.
Spending-stimulus advocates believe the government can create economic growth by “injecting” new money into the economy, increasing demand and, therefore, production. This raises the obvious question: Where does the government acquire the money it pumps into the economy? Congress does not have a vault of money waiting to be distributed. The Federal Reserve could print a bunch of new money, but that would send inflation soaring and make us no better than a banana republic. Therefore, every dollar Congress “injects” into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.
Spending advocates typically respond that redistributing money from “savers” to “spenders” will lead to additional spending. That assumes savers store their savings in their mattresses or elsewhere outside the economy. Continue reading…