January 16th, 2009

The Error of Economic Stimulation


photo credit: thehalfshow.com

Throughout recent months, America has been subjected to a variety of Congressionally-induced economic stimuli. These events take the form of legislation whisked through the chambers of Congress with lightning speed, and newly-created programs and committees that refuse to implement the transparency they promised and shirk any proferred oversight.

And now, the Democrats are in control. While their elephantic counterparts are hardly any better (after all, they were the ones who vociferously supported the original mother of all bailouts and its successors), Pelosi and her underlings have been tirelessly drumming up support for a second stimulus package, among other interventions.

With that in mind, it might be helpful to take a look at how the first stimulus was implemented. Dave Barry explained the purpose and process perhaps better than anybody else:

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.
Q. Where will the government get this money?
A. From taxpayers.
Q. So the government is giving me back my own money?
A. Only a smidgen.
Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.
Q. But isn’t that stimulating the economy of China?
A. Shut up.

Barry’s clarification of the stimulus is faulted with only one error; the presumption of a self-inflicted wound is not entirely correct. In reality, we are saddling future generations with the burden of our debt. This changes only under circumstances where the inflationary effects are accelerated and felt by the taxpayers within a shorter time frame (as an example, getting the stimulus and then having food prices rise 20% within a year would be a direct and relatively immediate burden).

Frederic Bastiat was slightly more accurate in his assessment of this type of government intervention:

Self-preservation and self-development are common aspirations among all people. And if everyone enjoyed the unrestricted use of his faculties and the free disposition of the fruits of his labor, social progress would be ceaseless, uninterrupted, and unfailing.

But there is also another tendency that is common among people. When they can, they wish to live and prosper at the expense of others. This is no rash accusation. Nor does it come from a gloomy and uncharitable spirit. The annals of history bear witness to the truth of it: the incessant wars, mass migrations, religious persecutions, universal slavery, dishonesty in commerce, and monopolies. This fatal desire has its origin in the very nature of man — in that primitive, universal, and insuppressible instinct that impels him to satisfy his desires with the least possible pain. (Frederic Bastiat, The Law)

Bastiat here correctly notes that it is man’s nature to seek his own increase through another individual’s decrease. More insidious, though, is the action of imposing your burdens on future generations who have no say in the matter nor opportunity for remonstrance.

But this is what the modern so-called “stimulus” is all about. Absent from what little discussions there are in Congress is the explanation of where the money will come from; this should be a alarming indication of this exact pernicious profiteering Bastiat refers to.

It seems, though, that America has come to accept and expect stimuli in all its forms. Whether through action-packed video games, titillating movies, energy drinks, or money in the mail, individuals feed off of one stimulus after another. These artificial highs will always be followed by deeper and more drastic lows, thus creating a net negative in the aggregate. You can only stimulate for so long before the body shuts down for self-preservation.

21 Responses to “The Error of Economic Stimulation”

  1. Reach Upward
    January 17, 2009 at 9:58 am #

    And then we compound the problem by diminishing the number of future taxpayers that might (in some fantastical way) cover today’s largess.

    More people are avoiding the inconvenience of having offspring through various methods. Many deliberately choose to severely restrict the number of children they have so that the few they have can enjoy a lavish lifestyle. Others produce progeny in a profligate manner such that many of their offspring are destined to become net burdens on society rather than net producers.

    The effect is that while we are irresponsibly creating debt for future generations, we are simultaneously creating a situation where there will be far too few producers to cover that debt, let alone the expenses germane to their own generation.

    But why worry? We’ll be dead by then, right? Ain’t selfishness grand?

  2. Mrs. B. Roth
    January 17, 2009 at 12:12 pm #

    And so what do we do? I’ve written to the senators and congressmen. Twice each. What else? I’m trying to get out of debt as an individual, but that means no vacations, no new TV or car, walking when possible, and living on bare essentials – not good for stimulating the economy.

    Meanwhile, didn’t my government give Citigroup a bunch of money – I’m giving Citigroup a bunch of money, too – seems like the only ones benefiting are the mega rich. Is Congress invested in Citigroup?

    I don’t know how to stop it. I think we are in over our heads and I would rather do whatever it takes and face the tough times NOW than make my kids and grandchildren suffer – is that a minority opinion or is everyone else just more interested in spending their “free” money?

    What can be done?

  3. joe
    January 18, 2009 at 1:02 am #

    Reach Upward,
    I have a problem with the idea of having children for the sake of them becoming future taxpayers. I don’t find the idea of being a ‘productive’ member of society, whatever that means to be life giving. I might be misunderstanding what you said. As it is possible to be a taxpayer, be productive and functional, and operating at your full potential and living a fulfilled life. So not necessarily a conflict in that way.

    I don’t enjoy my current job, but I am productive, in the sense that I am a cog in the organization, providing a function. I personally feel that I am not functioning at my full potential, but I don’t see any way to get out and move ‘up’, very fast at the moment. or move in a different direction which may not be ‘up’.

    I find comfort in creating cards which I have sent out to friends and family, and a few people have bought some, but I certainly can’t say its an economic success so far. But it has managed to provide me joy and happiness that I never knew was possible. It also has helped me quite a bit to try and figure out what other people might want in a card. Money is important if it helps you meet physical and emotional needs, but its not the end all. Certainly I believe that one needs to fulfill basic needs before you can advance ethically and emotionally.

  4. joe
    January 18, 2009 at 1:10 am #

    Mrs. B Roth,
    It sounds like you are very thoughtful, and are doing the right thing, although it probably doesn’t feel fun in many ways. Your not alone thats for sure. I think the government didn’t think things out very well, did anyone anticipate that this new money would just remain with the bank? I would have rather seen a program for assisting homeowners stay out of foreclosure.

  5. Carborendum
    January 18, 2009 at 9:47 am #

    While I agree with Besiat here, I’m not sure his comments were meant to refer to such a stimulus package.

    I see a grander fault in the whole concept of the stimulus package as applied today. Production.

    Unless something is produced, we are trying to create something out of nothing. I mentioned to a co-worker that such a concept violates the first law of thermodynamics. (He’s also an engineer involved in politics and the economy).

    His response was that the laws of economics and monetary policy may or may not operate under similar principles. We’ve done an experiment for the past several decades and we’re merely waiting for the results. That’s how slowly the economy responds.

    I asked him how he thought we were doing. No response but an ambiguous look and shrug.

    If the stimulus is used to PRODUCE a good rather than merely ACQUIRE a stimulus, then it could do some good. But in most cases, we’re trying to acquire something that has already been produced but would otherwise be considered useless.

    If a stimulus package were designed to allow homeless people with the will to work a way to produce their own food, clothing, and shelter I think it would do some good. But we’re being asked to find it our patriotic duty to go to the mall.

    Bush did it before, now Obama’s going to do the same thing. Dems loved using the epithet McBush to describe how McCain was no different than Bush. Is there much of a difference between Bush and Obama? Not much when it comes to the economy so far. We’ll see how he develops as time goes on.

  6. Justin
    January 18, 2009 at 1:16 pm #

    I enjoyed the Q and A portion of the post.

    It is something I struggle trying to explain to others, as well as understand myself. The Government is incapable of “having” money. Any money that they do anything with either came out of the economy via taxation or it was borrowed from China with our children as collateral. So…how can the Government “grow” the economy by shrinking it thru taxation to “grow” it thru “stimulus”.

    All this stimulus/bailout talk is driving me bonkers. And I’ll tell you one thing, it is like cocaine. That is what Connor was referring to when he said that each artificial high is followed by an even lower low. As a former cocaine addict, I know there are only 2 directions to go to get out of the cycle of this addiction to stimulus:
    One, to hit a “bottom” and repent and reform.
    Two, to go broke, OD, and die.

    I don’t see our government repenting.

  7. Connor
    January 18, 2009 at 10:03 pm #

    The author of this excellent article says the following, relevant to this discussion:

    In our post-literate world, because ideas are inaccessible, there is a need for constant stimulus. News, political debate, theater, art and books are judged not on the power of their ideas but on their ability to entertain. Cultural products that force us to examine ourselves and our society are condemned as elitist and impenetrable. Hannah Arendt warned that the marketization of culture leads to its degradation, that this marketization creates a new celebrity class of intellectuals who, although well read and informed themselves, see their role in society as persuading the masses that “Hamlet” can be as entertaining as “The Lion King” and perhaps as educational. “Culture,” she wrote, “is being destroyed in order to yield entertainment.”

  8. Connor
    January 19, 2009 at 10:12 am #

    Here’s another great and applicable article. A snippet:

    However, make no mistake. By focusing this Keynesian stimulus plan on creating jobs, in all reality most of the $775 billion will be wasted on paying for the government officials to disburse the bailout (hey more non-producing jobs!), corporate corruption, and incredible inefficiencies. In reality, the Obama-Biden plan will likely create and sustain higher levels of unemployment than right now, just like FDR’s New Deal did.

  9. Reach Upward
    January 19, 2009 at 10:52 am #

    @joe (1): I don’t suggest producing offspring merely to generate future tax revenues. However, as Justin points out, our politicians have effectively mortgaged future generations of taxpayers in an attempt to assuage our immediate distress. Thus, I am merely pointing out that the math behind the deal won’t work.

    In fact, I would argue that we have no right to force our progenitors to subsidize what our generation believes to be important. That is tantamount to slavery. Just because these people are not yet born does not diminish its insidiousness.

    Rather, as Gandalf tells Frodo in Lord of the Rings, it is our duty to provide the best possible opportunities for future generations. What they do with those opportunities is their business. And, at any rate, they will face their own challenges in their own time. Creating debt that future generations must pay based on the concepts of the pro-stimulus crowd is the exact opposite this principle.

    @Connor (1): “News, political debate, theater, art and books are judged not on the power of their ideas but on their ability to entertain.” The list should have included education, since it has devolved to an entertainment form as well.

  10. joe
    January 19, 2009 at 11:19 pm #

    Justin,
    The majority of the money is information in computers. I imagine that the majority of money in most other countries is also information in computers. The system is built on the psychology of debt, with a select few manipulating the numbers. Don’t you think its odd that other countries may also need a similiar package? Some of which are supposed to be in the black and not in the red?

  11. joe
    January 19, 2009 at 11:30 pm #

    Reach upward,
    Thats one way to keep people busy and working, working harder, longer and for less. How does the LDS work ethic fit into this? Isn’t there something in the LDS belief that work, no matter how mundane and ensalving has redeeming value in and of itself? Mostly to keep people too busy to sin. In some schools of the christian faith leisure time is sinful in and of itself.

    Potlatching during some periods of time was made illegal in the United States and Canada.

    “Potlatching was made illegal in Canada in 1885[9] and the United States in the late nineteenth century, largely at the urging of missionaries and government agents who considered it “a worse than useless custom” that was seen as wasteful, unproductive which was not part of “civilized” values.[10]” Wikipedia

  12. Justin
    January 20, 2009 at 6:25 am #

    So all this “psychology of debt” stuff sounds like Willie Coyote running off the edge of a cliff while chasing the Roadrunner. He never fell until he looked down and realized he was just standing on thin air. So does our house of cards never fall down until people start noticing that it is built on phony money created invisibly on a computer?

  13. Connor
    January 20, 2009 at 1:11 pm #

    The list of businesses and sectors we apparently need to stimulate are almost humorous:

    • $650 million to help Americans upgrade to digital cable after the official transition to digital television on Feb. 17, 2009.
    • $44 million to repair and improve the headquarters of the Department of Agriculture in Washington, D.C.
    • $276 million to upgrade and modernize information technology at the State Department.
    • $3.1 billion to fund “infrastructure projects” on federal land, including $1.8 billion for the National Park Service, $650 million for the U.S. Forest Service, and $300 million for the National Fish Hatcheries.
    • $600 million for NASA, including $400 million for projects such as “satellite sensors that measure solar radiation critical to understanding climate change.”
    • $1.9 billion for the Department of Energy for “basic research into the physical sciences,” including nuclear physics and fusion energy.
    • $209 million for maintenance work at the federal Agricultural Research Service’s research facilities across the country.
    • $400 million in repairs to various “national treasures,” including $200 million for revitalizing the National Mall, $150 for maintenance at the Smithsonian Institution, and $50 million to make up for a lack of philanthropic support for the arts.
    • $850 million for “wildland fire management,” including $550 million to states for “volunteer fire assistance,” “city forest enhancements” and “wood to energy” projects.
    • $400 million for “habitat restoration” projects to be doled out by the National Oceanographic and Atmospheric Administration.
    • $2.7 billion for “rural water and waste disposal” grant programs for providing loans for digging wells or extending municipal water services in rural areas.
    • $2 billion to provide day care services to 300,000 additional low-income children, ostensibly while their parents are at work.
    • $1.2 billion to create an estimated 1 million summer jobs for young people.
    • $2.5 billion to upgrade government-owned housing projects with new insulation, windows, and furnaces.
    • $6.2 billion to weatherize the homes of low-income people to make them more energy efficient.
    • $2.4 billion for projects demonstrating carbon-capture technology.
    • $600 million to “prepare our country for universal healthcare” by training more doctors, dentists, and nurses.
    • $1.5 billion to build new “Community Health Centers.”
    • $20 billion to provide “nutrition assistance” for middle-income families and to lift restrictions on how long people can receive food stamps.
    • An undisclosed amount to “provide 100 percent federal funding through 2010 for optional State Medicaid coverage of individuals (and their dependents) who are receiving unemployment benefits or have exhausted those benefits.”

    Hey, at least the pockets of the wooden arrow industry aren’t being lined with our money this time, right?

  14. Carborendum
    January 20, 2009 at 1:13 pm #

    Justin,

    I’m not so sure that the awareness of the fiat system is what will cause a “fall” to disaster. Most of us are already aware of it, but we keep earning and spending like the rest of the world.

    Only a “crisis” will cause the fall. That will come in many forms. A drop in consumer confidence, a drastic drop in housing prices, free money to people who haven’t earned it, a drop in the stock market causing trillions of dollars to be lost, sudden drastic changes in employment rate, corrupt corporations deceiving the public, financiers absconding with hundreds of millions or putting their clients’ money into Ponzi Schemes.

    You know things like that. I sure hope such things don’t happen in our life time.

  15. joe
    January 20, 2009 at 9:36 pm #

    Justin,
    Yes, I think it works like that. I like Carbs explanation. Money is a social contract, its also pretty abstract. Although I know that I myself attach a level of worth to money which doesn’t exist, apart from it being a social contract. Its so deeply ingrained its difficult not to think it has value. People have used stones, shells, even cigarettes as money.

    Paper money or electronic money has little to no real value by itself. Gold and silver coins have some intrinsic value, in that they have specific properties which are useful. They also have more limited quantities, so they tend to sustain their value. But directly their use as money is still a social contract and convention to facilitate trade. The money contract/system falls apart when a significant number of people fail to benefit from it, become disillusioned. Many people can see that its not real but buy into it because its what they know or fail to see better options.

  16. joe
    January 20, 2009 at 9:48 pm #

    Reach upward,
    Please forgive my lack of sensitivity. I aplaud you for thinking about the economic future. I hope your also thinking about the physical future in terms of the environment, as there are a number environmental problems which are said to only get worse from this point on, even with dedicated efforts to improve them. I wondered today if the government has any intensions of ever honoring its debts. If no, this is a very sophisticated way of stealing.

  17. Marc
    January 22, 2009 at 11:19 am #

    Lets all keep in mind that the current crisis and bail out plans are intentionally designed to ruin America. They are not the acts of ignorant men. This is just another act designed to bring America into the NWO. They are digging a pit for us folks. At some point they will fall into that pit themselves. Satan is the master mind behind the treachery.

    Moroni warned us to awake to our awful situation before the secret combination “gets above us”. Well, It has gotten above us.

  18. Smoe
    January 22, 2009 at 9:56 pm #

    Marc,
    New world order conspiracy theory is presented by those on the far left and on the far right, by people fearing the loss of their particular freedoms and ideologies. You credit satan as the mastermind behind this. However, I have read versions which credit Jehovah, jews, the catholic church and christianity in general. Its all paranoid. Is it even possible to place the world under one government? Even if its invisible?

  19. Carborendum
    January 23, 2009 at 1:45 pm #

    Smoe,

    I’ve never heard such a superficial, simplistic statement regarding the complexities of national or world politics than is represented in your statement outside of dumb blonde jokes and the like.

    I’ve read an awful lot of conspiracy theories (on both sides). Some seem pretty ridiculous. Some are more credible. But the official story just doesn’t do it for me. With all the arguments I’ve read, I’m still up in the air about it (from a debate/evidence perspective).

    To those who are absolutely convinced of powerful conspiracies operating all around us, I say

    You haven’t read enough.

    To those, like you, who are absolutely convinced they’re all paranoid, I say

    You haven’t read enough.

    Even though, to me, the evidence and logic is still up in the air, I get a reaction in my gut that says there are conspiracies all around us. But it could be the Mexican food I had for lunch.

  20. Smoe
    January 23, 2009 at 9:47 pm #

    Carb,
    “This is just another act designed to bring America into the NWO….Satan is the master mind behind the treachery.”

    I know you didn’t say that, but “…I’ve never heard such a superficial, simplistic statement regarding the complexities of national or world politics than is represented in…” that statement….

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