In medieval times, the height of medical knowledge was the leech. Unaware of the origin of sickness, peasant doctors would use leeches to drain blood, for they believed that removing the blood would release the disease from their patient’s system. Unfortunately, the common side effect of bloodletting was death. In modern times, this archaic practice is considered laughable—a series of erroneous assumptions and false premises led to a fatal cure. So it is with the notion of economic stimulus through government intervention in the economy. The irony of government stimulus is that it does nothing to cure our economic ills and in fact harms future recovery.
The theory of “stimulus” through government originated with the famous British economist John Maynard Keynes. Keynes’ theory was simple: When the economy is struggling, the government could pump money into the pockets of individuals. With their new government check, people could buy more goods. With an increase in consumption, producers would hire more workers. With higher employment, the economy would stabilize. This highly simplified model of Keynes’ theory is the basic assumption behind the American Recovery and Reinvestment Act (ARRA) and the Troubled Assets Relief Program (T.A.R.P.) passed earlier this year. While ARRA focused on grants and individual stimulus checks, the U.S. government used T.A.R.P. to supply banks with huge sums of cash, hoping that they would increase their lending to small businesses and subsequently jump-start the economy.
There exists, however, several logical inconsistencies in the Keynesian theory and our ill-conceived stimulus packages. To begin, the money that is pumped into the economy must first be drained out of the economy through taxes, otherwise the government would have no money to spend. For every dollar sent to banks or individuals, other individuals were taxed and thus produced or consumed less. The act of taxing and spending is much like using a bucket to gather water from one side of a tub and pour it into the other side; nothing changes other than the distribution of water.
President Obama’s T.A.R.P. program focused on injecting banks with money in order to increase lending, but since the U.S. government is running a deficit, he needed to borrow money to give it to the banks. One source of these loans was, among other things, U.S. lenders. There is a finite number of loans in an economy, and when the government purchased domestic loans to prop up failing banks, they reduced the number of loans normally available to American businesses and individuals. In short, the government drained the blood out of our economy to try to cure our rapid blood loss, and we have paid for it dearly.
Despite both ARRA and T.A.R.P., our economy remains stagnant, real unemployment currently sits at 16.8 percent and our government is facing a future “double-dip” recession. Had Obama simply left the American people alone, the private sector would have eventually recovered and spared us the huge government bureaucracies, inflated currency, mind-boggling debt and higher taxes wrought by “stimulus.” It is time for Congress to put down the leeches and accept that government spending has not and will not resuscitate the market.
Posted by 0x997
Tuesday, October 13, 2009 at 10:40 PM
HOOVER WUZ RIGHT!