Monday, December 22, 2008

The Economic Stimulus Package, Part II

I discussed the follies of the first stimulus package earlier this year, but bad ideas die hard. Currently Japan, Germany, Spain, India, the United States and many other nations are planning some kind of fiscal stimulus. What these governments are not recognizing is that to put extra money into the market, you must first take it out, either taxes or debt (future taxes). There is no new wealth created, only an awkward redistribution of resources (here is a video from the Cato Institute that explains it in more detail). There are at least six reasons why governments rarely improve economic panics: information problems, unresponsiveness, bias against innovation, political bias for constituents, rent seeking, and corruption. The graph below shows just how helpful the first stimulus package was:

Disposable income went up, but actual purchases didn't. But wait, wasn't it FDR's progressive government action that pulled America out of the Great Depression? No, says two UCLA economists:
After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

So if government transfers aren't the solution, what is? Let's again look backwards and see what has worked in the past:
When [Margaret Thatcher] came to power in May 1979, the British economy, by every measure, was in worse shape than the U.S. economy is today. Inflation was out of control. Unemployment was high and rising rapidly. Job creation had been at a total standstill for almost a decade and a half...

Yet by sticking to her policies of lightened regulation, reduced trade barriers, privatization of a raft of publicly owned companies, reduced taxation, and the adoption of laws to prevent abuses of union power, Mrs. Thatcher achieved something few if any of today's economists have begun to consider. She achieved a genuine, productivity-led recovery that transformed Britain from perennial basket case into the Europe's most improved and vibrant economy.
There is something the government can do, less.


  1. Ah, the great misconception about the New Deal.

    People forget that they went to such great lengths as slaughtering pigs to keep pork prices high all while people were going hungry.

  2. Yeah, I'm willing to say FDR is my least favorite president. At least Nixon and Carter are disliked for their mistakes.

  3. You could try the president who led us into the depression in the first place. Or perhaps the one who led us into history's greatest loss of American life. Just my opinion.

  4. Well I'm not sure which president I would blame for the Great Depression. But I think there is some trustworthy evidence that FDR prolonged it.

    As for "history's greatest loss of American life", do you mean Lincoln?


You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.