Are You Feeling Richer?

Both Bush and Obama tried various stimulus programs to jumpstart the economy during their presidencies. The idea behind all this stimulus spending is that if you put money in the hands of consumers, they will spend it and cause the economy to grow.

After the last five years of stimulus spending policies costing trillions, you would think that the economy would be roaring along.

But it isn’t, is it? In fact, we find ourselves trillions more in debt, unemployment still high (particularly if you count the millions who just plain gave up looking for work) and the growth rate is still too low to make us feel like there is any kind of recovery.

You see, the reason why these stimulus policies don’t work is that the government has to take money out of the economy (through taxation and borrowing) to fund programs such as rebate checks, “Cash for Clunkers” and to jump start shovel ready projects.

So if this sounds like taking water out of the deep end of a pool and pouring it into the shallow end, you’re on the right track but it’s actually worse than that. Anytime the government comes up with a program, it creates a bureaucracy to manage and administrate it. So part of the money that the government raises from taxes and borrowing goes to management overhead so what actually gets put back into the economy is less than what was removed.

So it’s more like taking a gallon of water from the deep end, spilling part of it on the pool deck while you walk around to the shallow end and then putting whats left in the shallow end. This actually reduces the amount of water in the pool.

See the fallacy behind stimulus spending (and also behind “making the rich pay their fair share” policies) is the theory that the rich are sitting on trillions of dollars that they aren’t reinvesting in the economy to create jobs. But that isn’t the case. Most of a rich person’s wealth is tied up either in savings in the bank (which the bank uses for loans to the government and to individuals creating economic activity) or more likely they are invested in owning businesses and stocks that drive the economy. Their money isn’t sitting in a mattress somewhere shielded from the larger economy.

This video uploaded in 2008 at the start of Obama’s first term outlined the problems with approaching the economy with the idea that the government needed to spend money to create demand to stimulate the economy.

The narrator might as well have been a prophet.



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