Sunday, January 01, 2012

Government stimulus myth continues to disappoint

Published in The Tennessean, Sunday, January 1, 2012

by Richard J. Grant

Where there’s a front, there’s a back; and so it is with demand and supply. For over three years, we have been told repeatedly that our sluggish economic recovery is due to an insufficiency of demand. We were urged to get out and spend — to stimulate the economy, we were told.

First, the Bush administration sent us all $600 checks; then the Obama administration pushed a $700 billion “stimulus” package. When we got our $600 checks, in a time of recession, many of us thought it prudent to save as much cash as possible. In our eyes it was prudent, but not in the eyes of government planners. They wanted us to spend — spend on anything.

If we preferred to save and provide for the future, then the government would do an end run around us. The stimulus package did not give us a choice: the government would spend for us — or despite us.

In times of recession or economic uncertainty, it makes sense for individuals to reduce or delay spending. When we do so, we reduce our demand for the products of many businesses. This affects the plans of the owners and employees of these businesses. But clearly, the mere fact that we are facing recession implies that we must all change our plans to some extent. Our plans have already become incompatible, so we need to get back in tune with the realities around us.

This reality is hard if your business is stuck with unsold inventory. It might seem obvious to you that your problem is insufficient demand. You might even be tempted to support increased government spending in the hope that it might help stimulate sales of your products. That might help your business, or someone else’s, but it cannot help everyone at once.

Even if we could separate government stimulus spending from political favoritism, which we cannot, such spending would still not create something from nothing. The stimulus myth implies that government somehow knows better than each of us what is best for us. But this was not true in the 1930s, and it is not true now.

The “demand-side” argument fails from two perspectives. First, need is not currency. Needing or wanting something is not equivalent to making something. Demand, in the economic sense, implies having something to offer in return for that which you desire. Having something to offer is what we call “supply.” In economics, the word “demand” is not an imperative; it is an offer to trade.

Second, demand is not generic. It matters to each of us what we purchase, how much, and at what price. Government policymakers might imagine some magical “aggregate demand” that they can augment through spending programs. But if such programs make us better off, it is only by accident. Policymakers can never have the detailed knowledge necessary either to know what we need or to coordinate the production and trade needed to achieve it. They just get in our way.

The Obama administration likes to tell us that their actions saved us from “another Great Depression.” As luck would have it, they are not as bad as the Franklin D. Roosevelt administration. But they try: taking over industries, controlling prices, imposing mandates and spending money that we have not yet earned.

Here is what they should try this year: Get out of our way.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: --------- Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011