The Stimulus Failed, (Part 5), Do you want your grandchildren to pay for your walking bridge?

Heritage Foundation: Stimulus Will Fail

TWO RIVERS BRIDGE: Opening nears.

People just don’t understand how wasteful government can be and how giving government more control of our lives destroys much of the freedom that we should have. This series on the stimulus demostrates these points. This whole series started because of a post I did on July 6, 2011 about an post in the Arkansas Times Blog.

On July 6, 2011 on the Arkansas Times Blog I posted concerning the walking bridge in Little Rock that stimulus funds help build:

Tim Griffin spoke in Central Arkansas recently at a townhall meeting and mentioned that a couple of million of stimulus money went to build the walking bridge in Little Rock that will be opening this summer. Then he went on to show how it was silly for our government to try to stimulate the economy with our national credit card.
Steve Chapman rightly noted in his article “Stimulus to Nowhere” noted:

The federal government took out loans that it will have to cover with future tax increases … so states don’t have to. It’s like paying your Visa bill with your MasterCard.

The person using the username “Arkansas Panic Fan” responded:

Bridge = good stuff for Central Arkansas. Not sure why it is a bad thing. It is your money at work here being used for your benefit. I applaud this type of government activity. This is the type of project and progress you can see, touch, smell, hear.

That being said, Saline Republican, is this a waste of your money? You can use it as you wish.

_________________________

I do not applaud this type of government activity because it is a waste of my tax dollars to pretend that you are creating employment that will get us out of a recession when in fact it was so simply then why don’t eliminate the private part of our society completely and allow us all to have public jobs. I understand Greece have over 50% of the people working for the government.

J.D. Foster’s testimony on Feb 16, 2011 before Congress shows how stupid the spending stimulus was:

My name is J.D. Foster. I am the Norman B. Ture Senior Fellow in the Economics of Fiscal Policy at The Heritage Foundation. The views I express in this testimony are my own, and should not be construed as representing any official position of The Heritage Foundation.

Signs of Taking the Wrong Road

The heart of the Administration’s approach to stimulus is the equivalent of fiscal alchemy. Alchemy, “the art of transmuting metals,” refers specifically to turning base metals like lead into gold. Fiscal alchemy is the attempt to turn government deficit spending—whenever, wherever, and on whatever—into jobs. Regarding near-term stimulus, it is not a matter of how wisely or foolishly the money is spent. It is not a matter of how quickly or slowly the money is spent. It is not a matter of whether some is saved or not—any more than the phase of the moon or adding a bit more wolfsbane or a stronger electric current enhances the prospects for lead to become the substance of an alchemist’s dreams.

The basic theory of demand-side stimulus is beguilingly simple. The theory observes that the economy is under performing and total demand is too low, and thus total supply needed to meet that demand is too low. It would appear obvious enough, then, that a solution is to increase demand by deficit spending and rising supply will naturally follow. The net of government spending over tax revenues adds to total demand. Increase the deficit and you increase demand, supply naturally follows, and voila: the economy is stronger and employment is up. One wonders then why government should not simply increase spending much, much more and create instant full employment.

Why, indeed. The answer, as is now obvious, is that this policy does not work for the simple reason that government must somehow fund this additional spending, and it does so by borrowing. Suppose you take a dollar from your right pocket and transfer it to your left pocket. Do you have a new dollar to spend? Of course not.

Or suppose you pour a bucket of water into a bathtub. You would expect the level of the water to rise. But where did the water in the bucket come from? It came from dipping it into the bathtub. You may make a splash, but when the water settles, in terms of the water level nothing will have changed.

An increase in government borrowing to finance an increase in deficit spending produces one of two ensuing events, either of which (or in combination) leaves total demand unchanged. First, the increase in government borrowing can mean a reduction in the amount of saving available for private consumption and private investment. Government demand goes up, private demand goes down, total demand is unchanged.

Alternatively, the increase in government borrowing may be financed not by reducing private borrowing but by an increase in net inflows of foreign saving—either a reduction in the gross outflows of U.S. saving or an increase in the gross inflows of foreign-sourced saving. Total demand remains unaffected, however, because the balance of payments still balances, and so the increase in net inflows of saving is matched by an increase in the net inflows of goods and services—the increase in the trade deficit offsets the increase in deficit spending.

Underlying this simple confusion surrounding demand-side stimulus is that the theory ignores the existence of a well-developed financial system, the job of which fundamentally is to direct private saving into private consumption, private investment, or government deficit spending. Even in the past few years, when the financial system has worked poorly in the sense that institutions have failed, markets struggled, and the direction of investment dollars has been less than stellar, the markets still managed to take every dollar of saving and direct it toward a borrower willing to take it and use it. Demand-side theory presumes the existence of financial markets, as government must rely on those markets to issue debt to finance deficit spending, but then ignores that absent the additional government borrowing, markets would have directed the saving to other purposes, which would have added to total demand in the same amount.

These economic relationships are analogous to the law of conservation of energy, which says that energy can be neither created nor destroyed in a closed system, but can only be transformed from one state to another. If we exclude the possibility of cross-border capital flows, then the closed system is the domestic economy and the energy conserved is the amount of saving available. If we allow for the possibility of cross-border capital flows, then the closed system is the global economy and the energy conserved is the amount of domestic saving augmented or diminished by the second closed system of the balance of payments.

 

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