More Stimulus Is Not The Solution

There has been a lot of discussion recently about what is needed to get our ailing economy moving again. Many around the Beltway seem to believe that we need another Stimulus package, because the first one “didn’t go far enough”. I submit to you that the notion that another Stimulus will help is absolutely false. There are three primary reasons for this.

Point #1
The American Recovery and Reinvestment Act (ARRA), did very little, if anything, to stimulate the economy. Even the White House’s own economic advisers fail to make a convincing case that it somehow boosted our economy and brought us back from the brink of economic calamity. On Friday, July 1, the White House released their Seventh Quarterly Report of the ARRA’s economic impact. They did so on the Friday before a long holiday weekend, which for those of you that ever watched the TV show “The West Wing”, is highly reminiscent of “take out the trash day”.

In this report, they estimate that the ARRA “created or saved” approximately 2.4 million jobs at a cost to taxpayers of $666 Billion. In their defense, the number of jobs is a very difficult number to estimate, because much of it is based on “what would have been”, which we have no way of knowing, but using their estimates, that’s roughly $278,000 per job. If we would have just given $30,000 to everyone that was unemployed, that would have had more economic impact and would have saved us a couple hundred billion dollars in the process. I’m not saying we should have done that, but I think it illustrates the point nicely.

In addition, the money we spent with ARRA was not spent wisely. If you look at the list of expenditures, it becomes very clear that the ARRA was nothing but an orgy of pet projects that Congress couldn’t have gotten funding for on their own merit. There were some projects that were worthy and provided some value to taxpayers, but the overwhelming majority of the spending was on pork that would do nothing to create jobs or boost the economy. Let’s also not forget, that we borrowed more money to pay for it, which will have to be paid back, with interest, by taxpayers.

Point #2
Government doesn’t create jobs. Does government spending boost the economy? The short answer is yes, but we have to keep in mind that any economic boost provided by it is short term and unsustainable. The numbers clearly show that GDP and employment got a boost. Although it’s difficult to say that it was a result of the ARRA, let’s assume for the sake of argument that it was. Even using that assumption, that facts are simply that any boost is finite because the spending will eventually end. We cannot continue to engage in government spending (that we can’t afford in the first place) because it will not solve our problems in the long term and it is nothing more than redistributing wealth from one taxpayer to another (“robbing Peter to pay Paul”). What’s more economically effective, two people working and paying taxes, or one person working and paying the taxes for two?

Aside from that, the main reason government spending is not sustainable is because the Government doesn’t create anything. In business, you have “Sales” and “Operations”. Sales generates the revenues that feed the company. Operations handles all the necessary administrative functions. Both are necessary and one can’t survive without the other, but Sales pays for itself where Operations is just an expense. Sales creates, Operations doesn’t. In the world of Government, the Government is Operations.

They provide necessary (and many unnecessary) services, but when it’s all said and done, they don’t create anything. They don’t “add value” which becomes the basis for an operation that generates enough revenue (and profit) to pay for itself. The cost is covered by you and I in the taxes that we pay. The Government has not, and will never, bring something to the market such as the personal computer, the cell phone or the iPad, upon which a self-sustaining revenue stream can be built. These things are created in the private sector, by private businesses and individuals, and are the source for all of the job creation. It’s just that simple.

Private businesses are constantly criticized for not creating jobs. They are accused of sitting on “mountains of cash” but not spending it to hire people. Anybody that has business experience can clearly see the flaw in this logic. Businesses need cash to operate. They have to have cash to pay for their facilities, vendors and payroll (you know, employee paychecks). Businesses don’t hire people just for the sake of hiring. They hire people when they have a need for more manpower, which just isn’t the case when Consumer Spending has remained flat, despite the “success” of the ARRA.

Point #3
Economies are driven by Consumer Spending. Consumers spend money. Businesses generate revenues and profits. When demand increases sufficiently, those profits are reinvested into the business to finance growth and expansion. That growth requires more manpower, creating job openings. People are hired to fill those jobs, increasing their incomes and purchasing power. Rinse and repeat.

Regardless of the fact that the ARRA appears to have increased GDP and employment, Consumer Spending has remained basically unchanged, which is why those of us in the real world have not seen much change in our economy over the last two years.

Average Daily Consumer Spending from 10/15/2009 through 6/25/2011 - Source: Gallup
Average Daily Consumer Spending from 10/15/2009 through 6/25/2011 - Source: Gallup - Click to enlarge

Our economy will not improve until Consumer Spending increases. Government spending may temporarily increase the amount of disposable income Consumers have to spend, but it does not impact how much Consumers actually do spend. Simply put, this is because Consumers are not stupid and they know it won’t last. Consumers know that it is only temporary and they will need to save some money for when it ends.

If we want to fix our economy, we need to create an environment that is conducive to job creation. This means getting out of the way of business, not adding to the difficulty of doing business here with more taxes and regulation. The recent issue with Boeing is a perfect example. Boeing wants to build a plant in South Carolina, creating about 1,000 jobs and pumping billions of dollars into the local economy. This would be done without the reduction of one job at their plant in Washington, yet the NLRB is blocking Boeing’s attempt to do this in order to protect the unions, which are one of the Administration’s strongest political allies.

You can find countless other examples of how government gets in the way of job creation. Whether it’s excessive regulation or taxes, it has a direct impact on a company’s ability to create jobs. Look at the states that have the most regulation and taxes on business (New York, California, etc.) and you will find that they are hemorrhaging money and jobs. Look at a state like Texas, which has no state income tax and minimal regulations on business, and you will see why 38% of the jobs created in this country in the last few years have been created there.

I’m not saying that we shouldn’t have any regulations or taxes, but let’s be reasonable about it. You can’t tax a company into the stratosphere and then complain that they’re not creating jobs or that they’re taking their business overseas. I guarantee you that American companies would prefer to have all of their operations here, but when regulations, taxes and the general cost of doing business becomes so oppressive, what do we really expect?

Let’s also keep in mind that corporate taxes are paid by the Consumer. Just like all other business expenses, taxes are passed on to the Consumer in the price of the goods and services that they purchase. Increasing corporate taxes just increases prices to Consumers, which means they will be able to buy less. Just as increased Consumer Spending drives the economy, reduced Consumer Spending sends it into a tailspin.

The bottom line is this. The first Stimulus didn’t solve the problem. Engaging in round two of Stimulus isn’t going to solve the problem either. It will just create more debt that we can’t afford without providing any sustainable benefits that we can rebuild our economy on. Stimulus doesn’t work because, just like most government programs, it addresses the symptoms and not the cause. If we want to fix it, we need to address the root cause of the problem, not just spend a bunch of taxpayer money and hope for the best.


+Kevin A. Nye

Photo by Adam Jones, Ph.D. – Global Photo Archive

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