Monday, March 16, 2009

The Problem With The Stimulus Package - An Illustration


Early last month, I wrote in critique of the stimulus bill, urging my readers to take action and contact their representatives to oppose its passage. One reason I gave was that it wouldn't actually stimulate the economy:

On the surface, it seems to make sense. The economy is doing poorly, so give it a fresh infusion of billions of dollars, and it will start to perk up. But the thing is that it isn't a fresh infusion of billions of dollars. This money won't be coming from some magical government storehouse of wealth to inject the economy with new cash- it will be coming from the economy. All the money the government will be spending to stimulate the economy is in the economy already. If you understand and can share just that one simple principle with others, the public will go a long way towards understanding why the stimulus package won't stimulate the economy. All this package does is move around money that already exists and is already in our economy.

A couple weeks ago, I was talking to a professor of economics at Belmont University- where I am wrapping up my final semester of undergraduate study- and he used a perfect illustration to help visualize the argument quoted above. I thought I'd share this illustration because it might come in handy when discussing the merits (or lack thereof) of the stimulus plan with friends, family, classmates, co-workers, or anyone else:

Imagine a swimming pool. You take a bucket to one side of the swimming pool and fill it up with water. Then you walk to the other side of the swimming pool and empty it there. How many times would you have to repeat this to raise the total level of the swimming pool? Answer: It is impossible to raise the level of the swimming pool by removing water from one end and pouring it into the other.

And that is what the stimulus package seeks to do. It purports to improve America's economy by "stimulating" it with cash infusions, but those cash infusions have to come from somewhere- guess where? The economy. The government is paying for the stimulus package by printing money, which siphons off purchasing power from the rest of the economy, and borrowing, which siphons off credit from the rest of the economy and creates debt that will have to be paid back with interest, and the money for that will come from the economy in future taxes and more printed money.

Our politicians are dishonest because they only want to acknowledge half the picture, the half where they pour water into the pool. They don't want to consider the fact that they are also pulling water out of the pool in the process. Government doesn't create wealth, it can only move around and deplete existing wealth. Government is not and cannot be the fountainhead of human wealth and prosperity, because it can only spend money that it has taken from somewhere else. In private hands however, productive capital actually creates wealth and raises the level of the pool.

2 comments:

Anonymous said...

To extend your pool analogy to one that makes sense:

Take the water out of the pool with 100 buckets (potential production), and leave them on the side. See how the level of the water goes down? That's people losing jobs, physical capital not being made use of, business contracting. So the housing bubble bursts, you spill 20 buckets, after all some of the production was this was a fake bubble, but you have this slack in the economy 80 buckets that aren't being made use of. Most non-ideological driven economists (unlike your professor) agree that there is slack in the economy now. It's not that we are readjusting to some proper state, or that things have to be this way. 9% unemployment is not the norm, the economy is contracting. So lets get some entity (the government) to pour the buckets back in (people keep their jobs, spend money, so businesses don't lay off or contract further.)

W. E. Messamore said...

"9% unemployment is not the norm."

It is in socialist European countries. If you want full employment, what you need is full production. If you want full production, you need saving, not just tons and tons of spending. The economy is going into a corrective cycle in reaction to the artificially expanded supply of credit. If we let it happen, we'll end up saving more and the economy will get back on firm footing. If we try to avoid the pain now (like we did after the Nasdaq crash), we're just stalling another recession (and it'll be worse for our stupid fiscal and monetary policy in the meantime). The thing that all "non-ideology driven economists" agree to is that there's no such thing as a free lunch.

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