Reverend Peter Marshall's Commentary Archive

 Why Obama's Stimulus Spending is a Failure

". . .Why do you not know how to interpret the present time?" (Luke 12:56)  

     I recently read an article which, for the first time, explained in clear, laymen's terms exactly why the Obama Administration's $787 billion stimulus spending has been a total disaster. Being a history and English person, the rather arcane workings of higher economics have remained a total mystery to me ever since I came within an eyelash of flunking the required Economics 10 course at Yale. But, finally having had one of those revelatory "aha!" moments about why Obama's spending insanity is truly insane, I decided to pass on my new understanding to you. 

The whopping big lie at the heart of the stimulus bill's failure is the Keynesian myth that government spending stimulates the economy. Roosevelt tried it in the 1930's, following the teachings of then popular economist John Maynard Keynes (whose ideas have remained all the rage among the left-thinking Democrats including the President), and it flopped miserably back then. In 1939, after huge amounts of government spending had failed to end the Great Depression, Roosevelt's Treasury Secretary Henry Morgenthau was quoted as saying: "We have tried spending money. We are spending more than we have ever spent before and it does not work . . . After eight years of this administration we have just as much unemployment as when we started . . . and an enormous debt to boot!" That, gentle reader, is precisely where we are now, except that our unemployment has continued to rise -- to nearly 10 percent nationally -- in the face of Obama's prediction that the stimulus spending would drop it dramatically. 

Keynes' theory, which one hears endlessly repeated by the Obama crowd, is that deficit spending by the government "injects new dollars into the economy," which is supposed to increase the demand for goods and services, thus spurring manufacturing and economic growth. According to Keynes, it doesn't matter how the government spends the money. He said that a program that paid men to dig ditches and then fill them in again would still put dollars in the ditch diggers' pockets, and those dollars would circulate through the economy, thus creating more jobs and income. Some economists still believe this. Mark Zandi, chief economist and co-founder of Moody's Economy.com, claims that every dollar of new deficit spending expands the economy by around $1.50. But consider this: if that were true, the economy would already have received a strong jolt upward. But the reverse is the case: it is expected to shrink by about 3 percent in this fiscal year. Now, the stimulus spending adds up to about 9 percent of the Gross Domestic Product, so if Obama's thinking is right, without the outrageous $1.6 trillion in government spending -- in other words, if the government had done nothing -- the economy would have contracted 12 percent! That's not even remotely plausible. Yet, we're hearing from some Democrats in Washington that what is needed is even more deficit spending. That's a formula for national suicide. 

If deficit spending theory really worked, the welfare societies of Western Europe would be explosively rich, for they have followed these teachings for years. But they aren't, and in fact are turning away from Keynesian theory as we are turning toward it! 

The reason that massive government spending doesn't stimulate the economy is that every dollar that Congress puts into the economy has to come out of the economy somewhere else -- either through the government raising taxes or borrowing the money. The Obama Administration doesn't have a pot of money stashed away somewhere that they can use to inject funds into the economy -- every dollar that they spend is just being redistributed from one group of people to another. 

It's easy to see the truth of that in terms of getting their spending money by raising taxes -- taking money from the taxpayers to give back to the taxpayers. But redistribution also happens if the government borrows the money, because the investors who lend the government the money will have less money to invest in the economy themselves. 

Government spending simply cannot create a net gain in demand and income. For example, for months Obama has been trumpeting that the stimulus bill has created new jobs for construction workers repairing America's bridges and highways, etc. But for every $1 billion that Congress spends on highways, it has to first borrow that $1 billion from the private sector of the economy, thus removing about the same number of jobs. You cannot remove dollars from one part of the economy and put them into another, and expect to expand the economy, any more than you can take water out of one end of a lake and pour it into the other end, and expect the water level of the lake to rise! 

Of course, if we're watching the evening news on TV, and a reporter shows us pictures of construction workers that have been hired in Wisconsin because of stimulus money that was sent by Washington, we think: "Great, new jobs!" But what we don't see on TV and don't tend to think about, is that a similar number of jobs could have been created somewhere else in the economy with those same dollars, if they had not been lent to the government to spend. There has been no net gain to the economy. 

Keynesian thinkers might respond that demand in the economy (which stimulates production and thus jobs) can be increased if redistribution transfers money from savers to spenders. Yet the fallacy in this thinking is the idea that saving money takes it out of the economy. But that is not true, unless the savers put the money under their mattresses, and next to nobody does that any more. Saved money is invariably put into banks or used to buy stocks or insurance policies or annuities, any one of which injects the money back into the economy with an expansionary effect. 

By the way, remember those rebate checks that the government sent out? They didn't have any good effect either, for all of the same reasons mentioned above. The government had to borrow that money from foreigners or investors before it could send out the checks, so again, those dollars were matched by declines in exports or domestic investments. The net effect was zero.   

Even foreign borrowing (think China buying U.S. Treasury securities) doesn't grow our economy. In the first place, China has to get the dollars from us with which to buy the securities, so it has to either attract American investment in China or raise their trade surplus with us (which raises our trade deficit). Our balance of payments with other nations has to eventually net out to zero, so government spending from foreign-nation borrowing doesn't work either. 

There is one other way that the government can raise money to spend, which it has been doing furiously of late: printing money. The Treasury Department can finance the orgy of stimulus spending by issuing bonds, and the Federal Reserve can buy the bonds by printing money with which to buy them. But, there is no free lunch here. All this printing of money will cause hyper inflation (all existing dollars are made worth less by the addition of more dollars), and the Federal Reserve will have to raise interest rates to get the inflation under control. But, raising interest rates will stifle the economy, since banks will pass on the higher interest rates they have to pay by charging higher interest rates on their loans to businesses. 

I hope that you can now see why the stimulus spending of the Obama Administration is a failed and destructive policy. Rather than helping to end the recession, it is quite likely that the effect of all this deficit spending will be to hamstring the recovery, perhaps by several years, or until these policies are ended. What we are now hearing from the media is that the pace of the recovery has slowed, and may stagnate. And that may be a result of the government's borrowing having dampened the private sector of the economy. 

Why do politicians in Washington pursue these failed policies? Are all the big spenders really deceived by Keynesian economic theory? Have they all drunk the Kool Aid? Do they really believe that massive government spending will grow the economy? Well, I think that some of them really do believe that they can make these policies work. But, I'm not a bit sure that Obama believes they will work. Have you noticed that his healthcare policies don't take effect until 2013 -- the year after he runs for re-election? He doesn't want to spoil his chances for a second term, because he obviously realizes how very unpopular these policies will be, once the public catches on to what is in them. What is giving him fits these days is that the public is catching on right now -- four years early -- to how ghastly and destructive his plans are! 

At the risk of sounding cynical myself, let me assure you that what is really behind all these horrendous policies is a cynical lust for power. The hard truth is that what motivates most of the people in Washington is not so much the love of serving the public, but the love of power. The name of the game in DC is how to get into a powerful or lucrative (or both) government position, and once in, how to stay there. To be sure, there are some wonderfully principled public servants on Capitol Hill -- my Congressman friend Randy Forbes (R-VA), and a number of others. But, sad to say, they are a minority. Power is a heady narcotic, and quite addictive, once one has tasted it. It's all about power, folks -- that is the main motivation behind the Democrats' attempt to gain government control over healthcare, which is one-sixth of the American economy! Control is also the main issue behind all the horrible regulations of business that are written into the 1000+ pages of the stimulus bill. More government control over the economy is the hidden aim in Obama's stimulus package. 

So, having seen what doesn't work in terms of stimulating the economy, what does work? What can the government do, if anything, to stimulate the economy -- especially in the short run? 

Since the government has been involved for a very long time in doing things that have had a stifling and strangling effect on our blessed free enterprise system, the very best thing government could do is to just get out of the way and leave the economy alone. But, the fact is that government can, and should do some things to reverse the bad effects of its actions. Unfortunately, short of a grass-roots conservative movement that will sweep out of office all those who support the policies of economic insanity, I think the chances of the Congress helping to solve our financial woes are little to nil. 

But, if the Congress were suddenly to "get it," here are two things they could and should do that work every time: lowering tax rates and lifting burdensome government regulations off business. Turns out that Ronald Reagan had it right (though some of us knew that already!). When he came into office he inherited an economy stagnating under a 70 percent marginal income tax rate. He cut that rate to 28 percent, deregulated the airlines and other industries, and thereby caused a surge in investment and employment that kicked off a 25 year economic boom -- the longest and strongest in American history! 

However, the time is winding down on us. It won't be long until the disastrous consequences of Obama's stimulus package take full effect. If the President continues to foist European-style socialism on the American people with failed Keynesian policies from the 1930's (in a time when the European nations are strongly turning against it!), then we will see continued high unemployment, high taxes, stagnant growth, and a sputtering economy that will be bypassed by the explosive growth of India and China. 

As long as the Democrats and their out-of-control spending ways remain in control there is no chance that Congress will do the right thing. Not until the American people mount a grass-roots conservative renewal movement, and cleanse the House and the Senate from those who would bankrupt the Republic, are we going to see a resurgence of economic sanity in Washington. The good news is that there are signs that the Tea Party movement may possibly grow into the tidal wave of reform that we so desperately need. 

We must all get actively involved in supporting this movement, and at the same time be much in prayer. Only the fervent prayer of America's Christians can save the nation. 

Postscript: For the contents of this commentary I am much indebted to an article by Brian Riedl in the September 7 issue of National Review magazine.

Copyright, 2009, Peter J. Marshall. All rights reserved.     

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