The 'Stimulus' Myth

'Government stimulus bills are based on the idea that feeding new money into the economy will increase demand, and thus production. But where does government get this money? Congress doesn't have its own stash. Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It's merely redistributed from one group of people to another.

Of course, advocates of stimulus respond that redistributing money from "savers" to "spenders" will lead to additional spending. That assumes that savers store spare cash 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). The money gets spent whether it is initially consumed or saved.

Governments don't create new purchasing power out of thin air. If Congress funds new spending with taxes, it is redistributing existing income. If the money is borrowed from American investors, those investors will have that much less to invest or to spend in the private economy. If the money is borrowed from foreigners, the balance of payments must still balance. That means reducing net exports through exchange-rate adjustments, thereby leaving net spending on the economy unchanged.'

- Brian Riedl, 'Why Spending Stimulus Plans Fail'.

Comments

fortruth said…
There is the moral aspect as well. Stimulus plans give unearned money to undeserving people by taking it from those who earned it. That make stimulus packages not just ineffective but immoral and harmful.
Jamie said…
One other thing bothers me: if you take capital away from producers in the form of higher taxes, you cripple their ability to increase supply.

If the idea is to redistribute this money to the working classes in order to get them spending and stimulate the economy, then surely the plan is foiled because you've taken away the capital required to meet this increase in demand.

More dollars chasing the same goods = higher prices, am I right?

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