The concept of a Keynesian stimulus never seems to tire among politicians eager to grow the economy artificially by spending other people’s money.
Recently, Obama’s Secretary of Agriculture Tom Vilsack encouraged expanding SNAP, the Supplemental Nutritional Assistance Program aimed to help the poor, as a way to stimulate the economy. “Every dollar of SNAP benefits generates $1.84 in the economy in terms of economic activity. If people are able to buy a little more in the grocery store, someone has to stock it, package it, shelve it, process it, ship it. All of those are jobs. It’s the most direct stimulus you can get in the economy during these tough times,” he said.
Still others are calling for additional hundreds of billions in stimulus spending as part of any deficit reduction deal coming out of the ‘supercommittee.’ If either of these ideas takes hold, it would be the fifth major Keynesian experiment since 2000. And rest assured, it would be its fifth failure.
If Secretary Vilsack is right, and if high systemic unemployment is the problem, then why not suggest a doubling of the SNAP program? The evidence now aligns with the theory, however, as our lawmakers have tried it four times already in quantities never before seriously contemplated, yet the unemployment rate remains above 9 percent and seems likely to stay at or above that lofty level for months, if not years, to come.
The idea that government can boost “aggregate demand” by spending sounds attractive, especially when resources are “idle” in the economy.
The argument is that during a recession people have less money to spend in general, and often increase their saving out of fear, all of which results in less consumer spending, or “demand,” in the economy, and therefore output (GDP) and employment fall. The economy is said to be operating below full capacity at this point. The policy argument then is that only government can step in to fill the drop in total demand by increasing deficit spending.
The problem with this reasoning, however, is deficit spending means more government borrowing which means less capital is available to the private sector. Even in a recession, savings don’t drop out of the economy. The financial system, which intermediates between saving and investing, between sources of funds and uses of funds, continues to function. Savings are channeled to investment or to spending by others and so contribute to the economy dollar-for-dollar as equally as consumer spending or government deficit spending. To borrow a line from the movie “Wall Street:” money never sleeps.
As my former colleague Brian Riedl put it, the economy doesn’t care if I spend $100 on baseball cards or if I save that $100 by putting it in a bank savings account, so that it’s lent out to someone else to spend on a pair of shoes. Either way, the $100 flows through the economy. At this point, some may ask: “Well wait a minute, what about when an economy is really depressed and no one is spending much?” Even in the case where total savings increase, banks don’t sit on idle cash in savings accounts. They would lose money doing so. At the very least, banks invest that money in government treasuries, or T-bills, so the former owners of the treasuries then supply them to the financial system to seek out those who need the funding.
That’s why having government put idle resources to use in one place requires equal idling of resources in another place: Government can only transfer money from one part of the economy to another, with no net increase in demand.
The key, then, to increasing growth in the economy is for the economy to better align resources with needs, to reduce the harmful uncertainty in the economy which reduces growth-generating risk-taking, and to encourage productivity growth through investment in productive capital in all its forms. The resulting growth will organically raise both total supply and total demand.
One key to get people to produce more is to reduce the disincentives to do so by allowing people to keep more of what they produce – i.e., tax rate reductions at the margins of income and investment.
So, regardless of what one thinks of the humanitarian imperative of increasing money for SNAP, or for additional “stimulus” money in other forms put forth by the ‘supercommittee,’ neither is an economic stimulus.