Many Americans like Gloria Clegg of Sugar Mill have mixed feelings about President Obama's Stimulus Package when she says, “I have no idea if it will work, but I sure hope it does.”
Intuitively, it would seem that if you throw enough money into the economy it would help things. However, this money-throwing exercise has been tried many times and there is no evidence that it has ever helped the general economy. Why is that so? There are at least seven good economic reasons why throwing money at an economy will not help things:
- First, in order to improve the economy you must increase production. There is virtually nothing in this money throwing exercise that induces people to generate more goods and services
- Second, throwing money into the economy creates a torrent of extra money, which will create a torrent of double-digit inflation down the road in one to two years. Inflation is very bad for an economy.
- Third, the stimulus program will take resources away from other projects, which are mostly of considerably higher economic value than the government-favored projects.
- Fourth, government projects are inherently inefficient.
- Fifth, bail outs create “moral hazards.” As long as businesses think that Uncle Sam will bail them out of any problem, they will keep making bad decisions because there is no penalty for bad decisions. For example, the automotive industry desperately needs to change the union contracts that are strangling it along with the bad practices that are being followed. Bail-out money will only delay fixing the problems.
- Sixth, the stimulus package includes funds to induce states to start more spending programs, which will have to be supported by state funds after the stimulus is taken away. There is no way this can be good.
- Seventh, the stimulus package includes money to pay people not to work, sometimes called unemployment compensation, sometimes called something else. When these funds keep people out of the job market, they cannot increase production.
There are other reasons, but these are enough to explain why no good economist is expecting the stimulus package top help the economy in any real meaningful way.
Sure, some people will receive windfalls and be happy, but the average American will be worse off than before.
The American economy is so robust that there is a good chance that it will still manage some sort of recovery. Then the Democrats will point and claim that the recovery is due to their actions instead of despite it.