According to economic philosopher John Maynard Keyes, economic recessions represent a failure of private markets to spend sufficiently for the economy to produce full employment. Simply put, people aren’t spending enough money. The theory behind government stimulus is the government should pick up the slack in consumer spending. According to the theory, this stimulus money should eventually flow to individuals and businesses who then spend it, thus increasing consumer spending that stimulates the economy. Problem solved. Well…not really.

In this scenario there is always an elephant in the room which no one wants to address: where does the government get the money for the “stimulus”? Excellent question since government does not produce or create any wealth of any kind. They simply extract wealth from one area of the economy (us) and distribute it to another (us). They can do this mainly in three ways:

1. Increase Taxes – Increase whose taxes? Big business (GM, Bank of America, ect.)? Remember, they’re the ones receiving the stimulus money this time around. Small business? The majority of economic growth and job creation comes from this group. How does taking money from small business people stimulate the economy? It doesn’t. When costs are increased small businesses tighten their belts and run leaner and meaner. They stop spending money, cease hiring new employees, and begin hanging on for dear life waiting for the economic storm to pass. Okay, so who do we have left to tax? Middle and lower class America? Obviously not. If you take their excess money they can’t spent it. So…now begins the war chant for “taxing the rich” and “making them pay their fair share”.  Go ahead and try it. Here’s what has and will happen: The “rich” people will take their business and begin moving it overseas where tax rates and labor costs are much less. They’ll take their money from banks here and put it in foreign banks. You don’t have to be Nostradamus to see this because it already is happening and has been for some time. 
2. Borrowing – The government cannot borrow from private citizens because the amounts are so large. They must indebt themselves to foreign nations (the largest holder of US debt is China). So not only does the country go into debt but it must also pay interest on this debt. Let’s suppose this scenario is successful; the US government borrows foreign money, infuses it successfully into the economy, and the recession ends. Everything is back to normal. Except…now we have debt and like all debt it eventually has to be paid. Remember that government does not create or produce wealth. So where do they get the money to pay the debt? They can borrow from Nation(A) to pay off Nation(B). But that still leaves us in debt. The only way the debt (with interest!) can be truly paid is by the American people through….wait for it…increased taxes. Borrowing money is a favorite solution among politicians because they won’t be in office when it has to be paid. Not to mention the US is borrowing money at a catastrophic rate.
3. Inflation – aka printing more money. Let us say that Babe Ruth autographed 100 baseballs throughout his life. We already know that a ball signed by Babe Ruth is worth some serious dough. But what if he signed 10,000? Would those baseballs be worth the same amount of money? Of course not. So now let’s say there are 2 million twenty dollar bills in existence. But the government prints 2 million more. Is that twenty dollar bill worth the same amount now? No. That twenty dollar bill will buy you less. When money becomes less valuable this is known as inflation. How does this help stimulate the economy? It doesn’t.

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” ~ Ernest Hemingway

It all goes back to the fundamental principle that money isn’t free. Wealth does not appear out of thin air. Everything has a cost. Someone must pay and that someone is always the American taxpayer. The wealth of the United States can only be created by its non-government paid citizens. Therefore, the answer to economic stimulus lies in empowering the American people to be productive.

Posted on Thursday, January 12th, 2012 at 10:28 pm and is filed under Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.