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Stimulus Packages


Why Should We Care about Stimulus Packages?
We should care because these packages cost a lot of money and their effectiveness should be questioned. And if there is not enough government revenue to pay for the package, the government must either borrow it or devalue the currency by increasing the money supply. Both of these are bad news.

What is a Stimulus Package?
When times are bad, governments often “come to the rescue” by providing the electorate with some form of fiscal stimulus (e.g. cash, jobs, tax cuts) to “jump start” the economy. The basic idea is that putting more cash in the hands of consumers will entice them to spend more and that this additional spending will entice businesses to hire more people to react to this new demand. The stimulus is the multiplier effect of the additional cash flowing through the Economy.

A Tradeoff of Short Run Benefits for Long Run Misery
Despite the fact that there is no empirical evidence that this tactic has ever worked, it is always the first experiment in the government’s bag of tricks to deal with economic downturns. The politician feels they must appear as though they are doing something, anything to mitigate the financial crisis. Besides, handing out other people’s cash is never unpopular. Unfortunately this is a very expensive proposition – especially if the handout is in the form of jobs (as opposed to cash or tax cuts). Cash can be a one-time expense; tax cuts cost no cash (but reduce government revenues, which should probably come down anyway). But using fake jobs to “jump start” the economy requires an ongoing cash flow output – the most expensive form of stimulus of all. So at the very least, this form of stimulus is the most inefficient. If we want to sponsor jobs programs, then we should call it what it is – a jobs program. It is not a stimulus package.

But the basic idea behind a stimulus is that it doesn’t last forever. So what happens when the job ends? Are we any better off? - Certainly not in the long run. Stimulus packages may generate some cash due to the multiplier effect, but sooner or later they stop, and so does the cash flow. There is no long lasting “jump start” effect. In fact, stimulus packages can be harmful in that the short-term cash can be misperceived as long run income and businesses begin to over-estimate demand. People think they are better off than they actually are, so they enter into purchase agreements they cannot afford, etc. Prices increase because demand increases. But as soon as the spigot is turned off, the party is over. Then prices fall back, profits shrink back to the original levels and the employees get laid off. Why? - Because it is an
artificial demand. So there may be some short-term benefit in that people have some cash and they don’t starve, but this may be offset by poor economic choices.

What about the long run? Well,
someone has to pay those wages. Who is this? It is the taxpayer typically in the form of the newly incurred debt. So unless there is a budget surplus, the net effect of stimulus packages is that society is worse off than before. And since all governments run deficits, the only thing that is “stimulated” in the long run is more debt.

The Lender of First Resort or Last Resort?
To the private sector, the federal government has often been called the “lender of last resort”. It provides an ultimate safety net to insulate American financial institutions from the full consequences of their risk. But some behave as if the government is the lender of first resort because they refuse to find alternative sources to reduce spending before they borrow money for their stimulus package. For example, President Obama says, “We must restore fiscal responsibility and make the tough choices so that as the economy recovers, the deficit starts to come down.” His plan is to increase the deficit so that it can eventually “come down”. Huh? He believes that the stimulus package will “save” money and “help reduce health care costs by billions of dollars each year.” “Debts continue to mount,” he says. His solution then is for taxpayers to go even further into debt by having those same families pay for their recovery with a plan that will not perform its intended purpose – to “jump start the economy”. This is an odd way to save money. Seems more like an illogical plan to waste taxpayer money.

“Governments cannot create but merely redirect. When the government spends, the money has to come from somewhere. If the government doesn’t have a surplus, then it must come from taxes. If taxes don’t go up, then it must come from increased borrowing. If lenders won’t lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value of those already in circulation. Something cannot be effortlessly created from nothing.”

~ Cliff Kincaid

Temporarily Extend Unemployment Benefits Instead
It should be obvious by now that stimulus packages are a bad idea, certainly an inefficient idea; and that financing them with public debt is an even worse idea. If you want employers to hire people to simply draw a paycheck, then they serve their purpose by temporarily staving off financial disaster for some. However they will not add any value to the economy nor will they do anything to magically qualify otherwise unqualified candidates so that they can retain any jobs provided to them via the stimulus package. People still have to master a craft to be useful in the labor market. That’s why they call them labor “skills”!

If you think about it for a minute, you will see that any such plan to "jump start the economy” assumes that the short run effect of the multiplier will continue perpetually. It cannot. Just like when you prime the pump of a lawn mower to get it started, there must be gas actually in the tank for such a strategy to work (the tank here represents the long run economy). It is clear to all that our lawn mower is out of gas and there isn't a station around for miles.

So short run "stimulus packages" like this NEVER WORK, they never have, and they never will in terms of somehow magically causing the long run economy to continue running. What they will do is cause a few unfortunate souls the opportunity for a few more paychecks. They are an expensive solution to providing short-term cash influx for desperate people. If that is the strategy, then it may be better to (temporarily) significantly enhance unemployment benefits (perhaps double or triple them) and extend them. This is more efficient because they expire anyway (unlike artificial government jobs).

The Problem is there are Not Enough Jobs
If the objective is to “jump start the economy”, stimulus packages don’t work. Extending and enhancing unemployment benefits will help to offset the negative effects of an economic downturn, but do not address the cause. Before we address the cause, we need to correct our thinking about stimulus packages. Since there are not enough jobs, our first impulse is to “create” jobs. But that flies in he face of the invisible hand of economics. The truth is there is no way to create jobs – only the economy creates real jobs. Any attempts to violate this rule of economics (like creating artificial jobs for goods not really demanded) will end in failure because they create further debt. Even if there were a surplus, the net effect would actually be zero, although it might allow some workers to buy time until the economy returns. So as a society, we need to support as many unemployed as we can in the short run while we figure out how to address the root cause in the long run.

What is The Answer?
To find an answer, we need to find the cause. What is the cause? The root cause is a lack of demand. In a well-balanced, more or less liassez-faire domestic economy, demand will entice supply to create enough jobs. Theoretically, wages and prices will equilibrate to produce a well-oiled and nearly self-sustaining machine. So where does demand come from? Demand comes from jobs. So jobs produce demand, which stimulates supply, which creates jobs. If the demand for goods is recurring, the jobs will last. What we have here is a dependency cycle where jobs require demand, but demand cannot exist without jobs. How can we create demand then? We cannot for the same reason we cannot create jobs. There seems to be no answer… or is there?

Where Did All The Jobs Go?
This is strange. America has been at this for a while rather successfully and all of a sudden we find ourselves with falling real income and we are losing jobs by the millions. What changed that allowed this dramatic shift in fortunes to occur? We had jobs, but they disappeared. Since the jobs disappeared, we have no demand and we find the benevolent economic cycle working in reverse. Where did the jobs go? And why is real income falling? The answer to both these questions is the same. The jobs are still there, they have just been given to other people – foreigners. The insatiable push to move first our manufacturing bases and then our entire means of production to foreign countries has left us in a very tough situation. The factories left town and the jobs went with them. Then we began importing foreigners to do the jobs here (via H-1B programs) and ignoring illegal immigration, in fact encouraging it with policies that offer free education for illegal immigrants and citizenship for their children born here. We actually intentionally created a demand for jobs from illegal aliens. We also created so-called “free trade” policies that allowed even more jobs to flee. All this cheap labor put a downward pressure on wages, and so we find our real income falling.

Why Did We Allow This To Occur?
It seems obvious in retrospect. If the means for production are moved to a foreign country, so will the jobs. First, the American people never had to worry about this in the past – large corporations used to work with government to formulate public policy. They actually considered the welfare of the American public at large in nearly every decision they made. In the past, such decisions would never even have been considered. This went out of style beginning around 1975. Almost all large American corporations are now multinationals and these corporations serve their stockholders only. We must have believed that somehow other jobs, better jobs would appear. They have not. They cannot and they will not.

The Solution

In the short run, increase unemployment benefits. The only long run solution is to “get the jobs back” by bringing production back to America (ending outsourcing) and ending all insourcing.