When the economy is not doing well why do a stimulus package? Should the country go in further debt to attempt a recovery or do other things and not incur further debt?
Is A Stimulus Package A Good Idea?
The answer is not as obvious as it appears. And, it can get complicated in a hurry. However, this is a very important issue in today’s world as further government intervention has a lot to do with our freedom, much more than most know. When we have even a beginners understanding of how our economy works and how it is manipulated we will have a better view of who we are voting for, or should vote for.
I am just a simple man on the street. Our attempt therefore is to take a complex issue and simplify it, to make it understandable. The point is to see how this matter of stimulus packages can impact our future as a nation, and how it can do so in a very big way. If you are interested in freedom you must have a basic understanding of how the financial world works, or how economic systems work.
A little Stimulus History
It all started way back in the Great Depression of 1929 to 1939. Unemployment lingered for many years. The main thought was that excess labor could not last long because wages would drop and the economy would recover and put everyone back to work. Since unemployment did not improve many opposed this theory. John Maynard Keynes posed another theory which took awhile but eventually became popular. Keynes said unemployment could remain high even though the market found demand equal to supply.
Such theories are all said to prove true through complicated mathematics. We are not going there but we do want to look at a few assumptions on which the math is based. Often the problem with a theory begins with the assumptions it makes. What Keynes wanted to do was to add together all products throughout the nation to arrive at demand and supply numbers. He called it aggregation. He wanted to aggregate all demand and all supply into two sets of numbers. That is not the big problem. Where the problem begins to develop is in his counting all government spending into his equations as part of goods consumed. This makes up a part of the GDP, Gross Domestic Product.
Lots of Spending for little Value…
The problem here is a lot of spending by government has no real value to our economy. As we approach 1939 America began spending large resources in building tanks, ships and other military armaments and equipment. These good were shipped to Germany where many were destroyed. Men and women went to war, other people built military goods and employment shifted from not being enough jobs to not having enough workers at home.
What happened with World War II was demand for certain products increased dramatically. The Great Depression ended and the credit was given to government spending on World War II. Keynes theory seemed to fit in his day and was accepted as the way the world works.
People today however would not be happy with the life style of how most people lived during those days. Many foods and supplies were controlled by the government and rationed. Jobs, although plentiful, were not in the type of work most wanted. When the war ended the government loosened its control. Demand for many products not readily available during the war began to be manufactured. Soldiers returning home drove demand even higher and employment surged. Many think it was not Keynesian theory that won the day as much as it was the end of the war.
Is Keynes Economic Theory the Best Answer Today?
As the years went by Keynes theory began to lose favor. Then in the 1970’s it became popular once more. Why? This is important because of the impact it has on America’s economy today and where that will lead us tomorrow.
Now let’s jump ahead to understand why Keynesian theory became popular in the 70s and 80s. The thought was that if demand could be increased and sold at various prices employment would improve along with the economy. How can demand and or supply for products be increased?
That is the role of advertising, to increase demand for the products advertised. Government believes increasing demand is also their role in a poor economy. Many believe the role of government is to stimulate the markets when the economy goes flat or stagnates, or becomes inflationary or goes into a recession or depression.
Typically government jumps in with a change in the tax code or a stimulus package. Do you remember the term voiced by Obama where he promised “shovel ready jobs”? But where does that money come from? To pay for any stimulus the money often comes from taxes, higher taxes. Or the government simply prints more money which deflates the dollar’s purchasing power. Proponents of this policy are what once again made Keynesian theory popular in the 70s and 80s by politicians who wanted government controls.
However, to achieve the best long lasting demand for products the money comes from an increase of income across the nation. When the people have more income to buy product demand will increase. How can that be done? Lower taxes put more money in the pockets of the people. Many believe that by giving the people control of where to place their own money will improve the economy in the best way possible.
What does this mean in today’s economy?
We have slipped back once again to popularize Keynes theory of 1939 where he proposed government interference to stimulate the economy. This theory plays into the hands of bureaucrats who want more control. They always see government dollars, our taxe dollars, as their solution.
People who want to control the economy believe they can influence demand for products and increase employment. We have mentioned the three ways government intervenes. Here they are once again with a bit more definition,
1. Increasing or Decreasing Taxes
This is a simple way the government can affect the wallets of tax payers. By lowering the tax rate people have more money to spend on whatever they choose.
In America’s recent history this worked for two Presidents. After President Kennedy’s assassination President Johnson implemented Kennedy’s proposal to reduce the tax burden. Both Johnson, in 1963, and President Reagan 1981, improved the economy and increased employment by cutting taxes. By putting more money into the pockets of the people the economy improves and unemployment is decreased.
2. Changing Investment Demand
When speaking of a countries economy the meaning of investment takes on a special twist. Investment here means dollars invested to improve the economy. Investments such as new equipment, tools, machinery or inventory and buildings to increase a company’s business or output would improve the country’s economy. This would also mean more jobs.
How can government increase investment of company’s in their business? Government adjusts interest rates. When interest rates are low business owners are more likely to borrow to improve their business.
3. Government Spending
Remember Keynesian theory assumes the greater the demand for goods and services the better our economy. More demand means greater manufacturing capacity which increased jobs. When measuring aggregate demand all consumption for all goods and services count, including government spending. When the government spends to build bridges or build roads or to buy the construction of a website it all counts as demand in the Keynesian theory.
When thinking about a government stimulus one has to think about how money from the private sector is taken by the government, paid back into the private sector, to stimulate it, can in fact stimulate it. It is highly questionable as to how money taken from a source and given back to the same places it was taken from can help its economy. Or, is this a transfer of wealth in disguise and sold to the American people as an economic stimulus program?
Where will the stimulus money come from?
Government may secure the money for a stimulus in two other ways. They could borrow the money or print more money. If they borrow the money the interest cost over time could wipe out any temporary benefits gained. If the government prints the money it is nothing less than an added tax in terms of the increased cost of buying goods and services. Printing money devalues the dollar making us pay more for any goods or service purchased.
Regardless of where the money comes from, is this “stimulus” simply a transfer of wealth? If so, who is the wealth being transferred to? Could it be that wealth is being transferred to cronies and supporters rather than staying with those who earned it?
But I am now already into the subject of our next article where we will see how government regulations, rules and interference impact money and its value. Once we work with the issue of money we will attack a historical solution to see possibilities for today. Please stay tuned – see the next two articles – as this and the money article leads into some solutions to discuss. We will see how at least one country has solved its high spending habits and brought them under control to the benefit of their country and a potential model for the USA to follow.