Washington and the Stimulus: A Parade of Blockheads

According to Bob Higgs we may as well call the so-called stimulus bill “swimming-pool economics.”  It’s based on the idea that if you take water from the deep end and pour it into the shallow end, the water level will rise.

Over the next few years, the February 4 report of the Congressional Budget Office (CBO) assures us, the stimulus is all sunshine and lollipops.  The CBO concedes that by 2019 the stimulus will have depressed GDP by somewhere between 0.1 and 0.3 percent, but almost no Washington politician has a time horizon that long.  (And even if those arbitrary figures were correct, they reflect only the palest shadow of the real consequences of the stimulus, as I explain in my new book Meltdown.) 

The Keynesian idea behind the so-called stimulus is that prosperity can be restored if the government is allowed to seize enough resources from the private sector and spend them on just about anything.

Well, to be fair, not quite anything: according to Section 1109 of the bill, “None of the funds appropriated or otherwise made available in this Act may be used for any casino or other gaming establishment, aquarium, zoo, golf course, or swimming pool.”  

The CBO provides us with the usual arbitrary estimates of the number of jobs the stimulus will create: between 1.3 million and 3.9 million.  Wherever they pulled those figures from (and I have my suspicions), what kind of jobs are these?  Are they jobs the economy would have produced in response to genuine consumer demand, or are they jobs the economy would have to be, um, “stimulated” into creating?  If “creating jobs” is all we want, we should hand out teaspoons and tell people to start digging trenches.  Government, since it acts in isolation from the market, can’t possibly know what kind of jobs actually yield value rather than simply squandering resources and wealth.

Section 3(a)(4) of the stimulus bill describes one of its goals as stabilizing “state and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases.”  Isn’t that nice?  Instead of having to raise taxes or (perish the thought!) cut spending, the states can simply get free money!  Why didn’t we think of this before?

Now if you’re a saboteur who hates America, which is how President Obama characterizes critics of the stimulus, you might be inclined to ask where the tooth fairy is getting the money she’s giving to the states.  Naturally, the CBO will not be detained by such trivialities, assuring us instead that the free money that apparently comes from nowhere will mean the states won’t have to raise taxes (as much) or cut back on “services.”

Well, that’s a relief.  While everyone else learns to get by with less, and many people genuinely suffer, it sure is good to know that the wise public servants who staff our state governments will be able to carry on as before.

The CBO is likewise delighted to report on how much the stimulus will increase personal spending, which in turn will have “a significant impact on GDP by early 2010.”  But leaving all the modern superstitions aside, “spending” per se is not the solution.  Our problems were caused by too much spending, and the accumulation of more debt than people could manage.  How can the solution to our problems be the same thing that caused the problems in the first place?

The Fed-induced housing bubble made people think they were wealthier than they really were.  Why bother to save when home equity makes it seem so unnecessary?  The result is what CPA Karen De Coster calls the “two-thousandaire”: the couple with the fancy house, fancy cars, exotic vacations, and $2000 in the bank.  Reality was going to set in for people like this someday.  Today is someday.  They cannot spend their way out of their foolish decisions, and it’s even more foolish for the government to urge them to try.

In other words, people on the eve of the bust were spending too much.  But the CBO cheers on the stimulus for vainly trying to keep the unsustainable spending spree going.  The economy’s structure of production needs to readjust itself in light of how much poorer people now realize themselves to be.  Cold Stone Creamery, which is now in serious trouble, is a good example: a business model that expects people to pay $6 for an ice cream cone isn’t going to survive the new and sensible priorities that the free market is urging households to adopt.

The stimulus-mongers, on the other hand, now with support from the CBO, intend to do whatever they can to prevent this healthy adjustment from occurring, and to try to inject life into the corpse of the bubble economy.  Every time they do so, they only postpone the economy’s inevitable adjustment to reality, and in the meanwhile keep alive zombie companies that compete for resources with genuinely sound and profitable companies.  As usual, the productive wind up having to support the failures.

In 1920-21, the United States endured a depression whose first year was worse than the first year of the Great Depression.  What got us out of it?  Inflation by the Fed?  Wasn’t tried.  Fiscal “stimulus”?  That’s a laugh — the federal government actually cut its budget.

No, what solved the problem was the free market itself, which was by and large left alone to clean out all the malinvestments and reallocate capital sensibly.  Before long, the United States was back to setting production records once again.

We won’t be so lucky this time.  Our central planners will make sure of that.