Spending isn’t stimulating

This article first appeared in the June 26 News & Observer.

RALEIGH — Nearly a year and a half has passed since President Barack Obama signed the federal stimulus package into law. How is that working out?

The president’s own economic advisers assured us that the deficit spending would help boost economic recovery and keep the nation’s unemployment rate under 8 percent. As of May, it stands at 9.7 percent.

In North Carolina, unemployment stands at 10.3 percent, and the only jobs being stimulated belong to the government. According to state Employment Security Commission data, since March 2009 – right after the stimulus bill became law – North Carolina’s private sector has lost 54,700 jobs. Conversely, government employment in the state has swollen by 31,600.

Amazingly, many are calling for yet more government stimulus, to be financed by deficit spending.

The pro-stimulus crowd recites Keynesian dogma that consumer spending drives the economy and a drop in “aggregate demand” by consumers causes recessions. Therefore, the argument goes, the government must step in to pick up the slack to jump start the recovery; we can worry about the debt later.

Such recommendations are chock-full of economic fallacies and would lead not only to a prolonging of the current recession but also to a long-term drag on our nation’s economy.

First off, where do Keynesians think the government gets the money to finance its deficit spending? For the most part, deficit spending is financed by the U.S. Treasury raising funds by selling debt instruments such as bonds or T-bills.

When the government sells its debt instruments, however, the money used to buy them comes from previously earned wealth already in the economic system. Funds are merely shifted away from the private sector into the hands of the political class.

Thus, deficit spending does not magically increase aggregate demand. To believe so is akin to believing you can increase the amount of water in a swimming pool by taking a bucket of water out of the deep end and dumping it into the shallow end.

Second, concern about consumer spending is misguided. A dip in consumer spending is not the cause of recessions but rather the result of recessions. The true factor dragging our economy into recession (and keeping it there) is the sharp drop in investment spending.

According to the 2010 report of the president’s Council of Economic Advisers, private consumption spending dropped by only 2 percent from its peak in the fourth quarter of 2007 to its low point in the second quarter of 2009. Total private investment spending, however, began its much more significant drop nearly two years earlier. Total private domestic investment reached its high point in the first quarter of 2006 and then fell by roughly 36 percent to its low point in mid-2009.

But despite those numbers, isn’t consumer spending still the key? We’re constantly told that it makes up 70 percent of the nation’s GDP.

This assertion, however, is highly misleading. Economist and former Columbia University professor Mark Skousen recently explained that GDP numbers exclude “a big chunk of the economy – intermediate production or goods-in-process at the commodity, manufacturing, and wholesale stages – to avoid double counting.” Total spending including all stages of production more accurately reflects an economy’s actual expenditures, according to Skousen. When measuring total spending using business receipts compiled by the IRS, Skousen found that “consumption represents only about 30 percent of the economy.”

Therefore, attempting to boost consumer spending is clearly a misguided approach. Diverting investment capital toward consumption spending via government borrowing only worsens the lack of investment actually causing the recession. And without investment in new equipment, factories, technology, etc., how will the recovery be funded?

As economist Robert Higgs notes, “Worn-out equipment, obsolete software, ill-maintained structures and depleted inventories are not the stuff of which rapid, sustained economic growth is made.”

In the short run, more deficit-financed government stimulus schemes would only prolong the recession. Worse still, the massive debt accumulation would be a drag on the economy for generations to come.

This article was posted in Economy by Brian Balfour on June 28, 2010 at 10:50 AM.

© 2011 The Civitas Institute. Visit us on the web at www.nccivitas.org.
This article can be found at http://www.nccivitas.org/2010/spending-isnt-stimulating/

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