Rick Akin: Why the stimulus did not work | SteamboatToday.com

Rick Akin: Why the stimulus did not work

“Deficit spending is simply a scheme for the confiscation of wealth.”

— Alan Greenspan

As is obvious, the stimulus bill did not work to stimulate the economy — sure it worked to buy favor and some votes, and the recipients of the funds were stimulated, but it did not stimulate the overall economy. The truth is that there was no possibility that it would stimulate the economy, and the reasons are easy to see.

The government does not create wealth. If it could, then it could just give each of us a trillion dollars, and we would all be rich. Wealth is created by private enterprise, and it consists of the goods and services for which a dollar may be exchanged. If there is no increase in the amount of goods and services available for purchase, but there are more dollars in the system, this just means that each dollar is worth less.

The second truth here is that the theory that government spending will stimulate the economy is fundamentally flawed. The additional dollars spent by the government must come from somewhere. While the person to whom the money is given by the government may be stimulated, the person from whom the value is taken experiences the opposite effect.

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Specifically, money spent by the government must come from one of three places:

  1. Taxes

  2. Borrowing

  3. An increase in the money supply, i.e., printing more money.

With taxes, it is easy to see that the dollar given to one is taken from another, but the effect actually is even worse than that. The increased tax rates act as a disincentive for productive members of society to produce. This means there is less wealth produced and there are fewer goods and services available. Consequently, government spending financed by taxes retards, rather than stimulates, the economy.

Government borrowing has a similar effect. If funds are lent to the government, then they are not available for other forms of investment or capital formation for business. They cannot be loaned to businesses or individuals or invested in business enterprises. The borrowing takes out as much money from the economy as the spending puts in. But again, it is really worse than that. Increased government borrowing will, at least throughout time, drive up interest rates, which again act as a disincentive for the producers to produce and again retards, rather than stimulates, the economy.

The Federal Reserve, like any central bank, can increase the money supply. This usually is accomplished by the Fed buying government securities in its open market operations. The difficulty here, though, is twofold. First, the creation of more money without the creation of more wealth in the form of goods and services just means each dollar is worth less than it otherwise would have been. It also acts to redistribute wealth because it decreases the wealth of people holding dollars or securities denominated in dollars, such as bonds. This strikes me as particularly pernicious since there is essentially no voter control of the Fed.

The better approach is to foster the creation of goods and services. By this, I do not mean the government subsidizing business. I mean the government getting out of the way. For the amount spent on the stimulus bill, personal and corporate income taxes could have been eliminated for two years. Now, that’s what I call stimulus.

So, Washington, let’s give this some further thought before you rush through more spending in Stimulus II.

Rick Akin is an attorney practicing in Steamboat Springs, Denver and Austin, Texas, a former member of the Steamboat Pilot & Today Editorial Board, and is vice chairman of The Steamboat Institute. He holds a Bachelor of Arts in Letters from the University of Oklahoma and a doctorate from the University of Texas.

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