Explaining Again Why Obamanian, or Keynesian, Stimulus Won’t Work

From The Stimulus Tragedy: Obama bets that we can spend our way to prosperity:

So there it is: Mr. Obama is now endorsing a sort of reductionist Keynesianism that argues that any government spending is an economic stimulus. This is so manifestly false that we doubt Mr. Obama really believes it. He has to know that it matters what the government spends the money on, as well as how it is financed. A dollar doled out in jobless benefits may well be spent by the worker who receives it. That $1 of spending will count as economic activity and add to GDP.

But that same dollar can’t be conjured out of thin air. The government has to take that dollar away from someone else — either in higher taxes, or by issuing new debt in the form of a bond. The person who is taxed or buys the bond will have $1 less to spend. If the beneficiary of that $1 spends it on something less productive than the taxed American or the lender would have, then the net impact on growth will be negative.

Some Democrats claim these transfer payments are stimulating because they go mainly to poor people, who immediately spend the money. Tax cuts for business or for incomes across the board won’t work, they add, because those tax cuts go disproportionately to “the rich,” who will save the money. But a saved $1 doesn’t vanish from the economy, unless it is stuffed into a mattress. It enters the financial system, where it is lent to others; or it is invested in the stock market as capital for businesses; or it is invested in entirely new businesses, which are the real drivers of job creation and prosperity.

But letting business and individuals decide how to spend and invest their own money doesn’t appeal to people like Obama, Pelosi, and Reid. They think that they know better than you how to spend and invest your own money. This is one of the best reasons to oppose the stimulus. The other best reason is that it isn’t going to work.


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