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Economic “stimulus” plan will not save us

The media, the politicians and most Americans seem to be in complete agreement: we need a stimulus plan that will pump a large amount of dollars in the economy so that spending will increase and therefore will enable the economy to get out of the rut it is in and back on track to economic prosperity. But aren’t we forgetting something? Instead of people first asking the basic question, “will a stimulus plan will work?” people seem jaded with current rhetoric of ’stimulus salvation’ and are only concerned with the question “how much money should be included in the stimulus plan?”

Team Obama will soon enter the White House and bring with him a massive economic stimulus plan (some estimate a plan including up to $700 billion). We should first backup and discuss whether or not stimulus package is the right action to take during these difficult economic times.

They are not well known amidst all the ‘stimulus salvation’ hype, but a growing number of economists and financial experts believe that any economic stimulus package will only worsen our economic situation. These select few stand squarely against the group-think mentality of the media, politicians, and many Americans who support a stimulus package.

Richard W. Rahn from the Cato Institute is one of those leaders who answer the unpopular question, “‘where does the government get the stimulus money from?”

“It must either tax someone else now or borrow more money, which diverts productive saving to current consumption,” Rhan says. “Either way, it is less than a zero-sum game.”

Rhan looks to history as evidence to why direct government payments (i.e. a stimulus package) will face.

“During the Great Depression, government spending soared as a percentage of gross domestic products, but full employment did not return until World War II. During the last eight years, U.S. government spending has greatly increased in both absolute terms and as a percentage of GDP, yet the economy now performs worse than it did a decade ago.”

And he’s right. The productive American tax-payer is the one who will pay for any sort of government stimulus package. Similar to the infrastructure overhaul that came with the New Deal by FDR during the Great Depression, every dollar spent by the federal government (such as Obama’s huge infrastructure project) is a dollar taken away from the tax-payer.

The infrastructure project President-elect Obama is proposing will only take jobs away from the productive private sector and give it to a usually unproductive public-sector job (recent data by the Bureau of Economic Analysis shows the average federal public-sector employee gets nearly paid double what a productive private employee earns).

While an obvious way for the government to get stimulus money is by increasing taxes, that isn’t easy during hard economic times (even for a liberal Democrat like Obama). However, this will hardly prevent the government from spending lavishly. Thanks to our Fiat money supply, the government can use another trick called money creation to receive more spending money. By printing new money, it can spend more.

But even the most unschooled economic student knows that printing money creates inflation. This again punishes the tax-payer when he comes to find out the dollars he has earned and saved is worth a lot less now than before. The U.S is currently $10.7 trillion in debt and plans on printing more money and creating more inflation to combat a recession?

Peter Schiff, President of the Euro Pacific Capital, predicted the housing bubble back in 2006-2007 and is also a minority financial expert who says a stimulus package will be bad news for the U.S economy.

In a recent editorial in the Wall Street Journal, Schiff argued a recession is actually the cure to the current economic crisis and isn’t supposed to be pain-free times. The transition from borrowing and spending to saving and producing cannot be accomplished without a severe recession, given the current imbalances of the US economy, he argued. Biting the bullet and dealing with these issues should be a priority.

Schiff is right as well. Introducing a stimulus package instead of allowing for a natural recession to occur would be equivalent to attempting to heal a broken leg by taking massive amounts of painkillers and continuing to walk on the broken leg. Just because we can’t feel the pain doesn’t mean it’s fixed. Instead, we should allow the painful recession to occur by staying off the broken leg until it heals properly.

 It is understandable that people feel a great urgency for the government to do something. And this urgency is no doubt a reason we are forgetting to discuss vital issues such as if a stimulus plan is the right thing to do in the first place. In the end, any stimulus plan will negatively affect tax-payers—the very entity we are trying to help. The best plan of action is this: the government should step back. We should allow a healthy, yet painful recession to occur that will eventually heal the market from the economic crisis.

Photo credit: mrknightblog.blogspot.com

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