Today the White House will host a Forum on Jobs and Economic Growth featuring such leftist luminaries as Joseph Stiglitz and Paul Krugman. Yesterday The Heritage Foundation hosted House Minority Whip Eric Cantor (R-VA) for a presentation on his common-sense job creation plan. After Cantor spoke, Heritage fellow Brian Riedl explained why President Obama’s $787 billion stimulus, and all the other government stimulus ideas of Stiglitz and Krugman, failed:
I’m going to examine why the stimulus failed, and why Congress should instead keep tax rates low and spending restrained in order to allow the economy to create jobs and grow.
In a January report, White House economists predicted the stimulus bill would create (not merely save) 3.3 million net jobs. Since then, 3.4 million more net jobs have been lost, pushing the unemployment rate above 10 percent.
This failure of government to spend its way to prosperity is not an isolated incident:
- During the 1930s, New Deal lawmakers doubled federal spending — and unemployment remained above 20 percent until World War II;
- Japan responded to a 1990 recession by passing 10 stimulus spending bills over 8 years (building the largest national debt in the industrialized world) – and their economy remained stagnant;
- In 2001, President Bush responded to a recession by trying to “inject” tax rebates into the economy. The economy did not respond until two years later, when tax rate reductions were implemented;
- In 2008, President Bush tried to head off the current recession with another round of tax rebates. The recession continued to worsen; and
- Now, the most recent $787 billion stimulus bill was intended to keep the unemployment rate from exceeding 8 percent. Instead, it now exceeds 10 percent.
These repeated failures are not an accident. They reflect the myth that government spending is a free lunch. Stimulus advocates assert that government spending injects new dollars into the economy, thereby increasing demand and spurring economic growth. It makes perfect sense under one condition:
No one asks where the government got the money.
Congress does not have a vault of money waiting to be distributed. Every dollar Congress “injects” into the economy must first be taxed or borrowed out of the economy. No new income, and therefore no new demand, is created. It is merely redistributed from one group of people to another.
Removing water from one end of a swimming pool and pouring it in the other end will not raise the overall water level – no matter how large the bucket. Similarly, redistributing dollars from one part of the economy to the other will not expand the economy, no matter how much is transferred. Yet that is all the stimulus bill is doing.
If government injecting $200billion into the economy so far creates 640,000 jobs — as the White House claims – then by the same logic, first removing that $200 billion from the economy must cost about 640,000 jobs
Spending advocates respond that redistributing money from “savers” to “spenders” will lead to additional spending. That assumes that savers store their savings 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). Therefore, the money is spent whether it is initially consumed or saved. It means all the money government borrowed for the stimulus, would have been spent by the private sector.
Let’s do the math. If deficit-spending represented “new dollars” in the economy, then the record $1.2 trillion in fiscal year 2009 deficit spending that began in October 2008 – well before the stimulus added $200 billion more – would have already overheated the economy. And if it didn’t there was no reason to believe that adding $200 billion more in 2009 deficit spending from the stimulus bill would suddenly do the trick.
So what should we do to create growth?
First, Congress should resist all tax hikes. There is no school of economic thought that would justify raising tax rates in a weak economy. Doing so would reduce incentives to work, save, and invest, and be productive.
Congress must also rein in runway spending. Last year, federal spending soared to $30,000 per household for the first time ever – up from $21,000 per household (adjusted for inflation) at the beginning of the decade.
President Obama’s budget would hike spending to $37,000 per household by 2019. It would more than double the national debt. This would raise interest rates, cost taxpayers trillions in net interest spending, and eventually lead to painful tax hikes
The only way to avoid this fate is to cut spending through four steps:
- First, do no harm: Resist totally unaffordable expansions of government-health care and energy subsidies. Stop increasing discretionary spending by 8% annually
- Then, take back unspent Stimulus and TARP money. They haven’t worked, and they are dragging us deeper in debt.
- Next, enact spending caps. So that lawmakers can better prioritize.
- Finally and most importantly, reform Social Security and Medicare. This is truly the most important reform, as these programs threaten to bankrupt the federal budget. A good first step would be adding the creation of a Bipartisan Entitlement Commission to the upcoming debt limit vote.
Let me wrap up by saying that — thanks to the economy’s self-correction mechanism — all recessions eventually end. And we may be moving out of the current recession. But its no thanks to the stimulus bill. We need to focus on building a strong economy recovery, driven by entrepreneurs and families. That means keeping tax rates low, and the government out of the way.