Thursday, January 8, 2009

Never enough

Obama is not satisfied with squandering $800B on a so-called stimulus package. I say so-called because in reality all the money will be spent on pet projects and union donors. But $800B is not enough anymore. He wants, more, more, more baby. And he has said that he sees no problem with vaing $1T deficit for years to come.

Bush was ripped apart when he produced $500B deficits only a few short years ago. And he was ripped apart by the very same people - Nancy Pelosi, Harry Reid, The NY Times - that are now clamoring for the so-called stimulus bill. Two wrongs don't make a right. Bush was wrong to spend the way he spent. But how the hell does the left do such a turnaround in such a short time? Are Democrats stupid, gullible or both? For 8 years all they say is deficit is too big, deficit is too big, and then come in and say they will double the deficit?

In the history of economics, stimulus programs have never worked. Never. It is the ultimate validation of Einstein's saying about insanity and doing the same thing over and over yet expecting different results. Stimulus programs don't work for three basic reasons.

First it takes too long to implement. It is the federal government after all. By the time the money is actually spent, the economy doesn't need it anymore and by then what happens is the stimulus money causes inflation.

Second, a $1 spent by the government is a $1 not spent by the private sector. So in the end it is a net zero of spending. But, it's actually a negative effect since there are added transaction costs that wouldn't exist in the private sector.

Third - and most important - short term actions do not influence long term behavior. Simply put if you give me $1000 today I will take that $1000 and put it in the bank. It won't change my long term behavior pattern at all. Think of it as a bonus. If you get a one time unexpected bonus from work, that you know is a one time thing, will you go out and make a financial decision based on that? Probably not. Yet it is long term decision making that moves the economy. Long term as in people deciding to buy a house or a car or start a business or expand a business. A $1500 check will not spur any of these activities. On the other hand, the promise of a $1500 reduction in taxes permanently, will have an effect at the margin.

Which is why Obama could spend $7B or $70B or $700B on a one time stimulus and it will have absolutely no effect.


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