Why the Stimulus Won’t Work

stimulus billThe Federal Government hasn’t had a stash of money for a long time. In recent decades, the Federal Government has had to borrow more and more of the public’s money in order to keep the government running and to fund the various entitlement programs. But we’ve recently hit a point where we simply can’t keep borrowing money and expect to maintain the same level of entitlements we’ve grown accustomed to.

The Federal Government doesn’t work for the money they spend. They don’t produce or sell anything that generates the money needed to keep the government running. Instead, they simply take a percentage of money from the working class and businesses in the form of a tax and “redistribute” the money in a variety of ways. For example, some of this money is used for defense spending, health care (Medicare), federal employee payrolls, welfare, pensions and a variety of other things that truly do help the People, the economy and keep the government running. These expenditures create jobs, provide services and help the less fortunate people survive. However, how the tax money is spent is the source of great debate and has been for many decades. It’s safe to say everyone believes much of it is wasted. Recently, the Federal Government decided they needed to “stimulate” the economy, so they spent $800 billion dollars. Question is, where did this money come from?

When the government decides they want to spend $800 billion to stimulate the economy, they borrow the money and go further into debt (where the loan money comes from is an entirely different and complex topic, but for all intents and purposes, the government does in fact have to pay this borrowed money back). The money they borrow will be tacked onto the federal debt, which currently stands at about $14,000,000,000,000 dollars. The way the debt gets paid back is by taxing the working class and businesses. The more the government borrows and spends, the more tax money they have to collect in order to pay back the loan plus interest. But there’s one small problem. They aren’t taking out a loan in their name or working off the debt by taking money from their own paychecks. Instead, they are taking out a small loan in your name each and every time they borrow money. And as your taxes increase, there is less money in each paycheck for you and your family to spend. In essence, that extra money you would have spent on fun stuff is now collected by the Federal Government and they will chose how to spend that money for you in ways they think will help the economy.

So, now that the Federal Government has this money, what do they spend it on? How do they know what to spend it on to heal a sick economy?

The theory is, the Federal government will use this loan money to try and stimulate the economy by infusing it into various sectors of the economy. They will spend the money on a variety of things such as road infrastructure projects to create a bunch of temporary jobs to help the unemployed, emerging technologies such as “green” projects, or perhaps distribute the money in the form of grants to invigorate innovation. The other thing they may do is give a chunk of the money to the individual States and allow them to spend it on the things they feel would best help their macro or local economies.

While this sounds like a good way to stimulate the economy, it doesn’t have a lasting affect. Once the temporary loan money is used up by the various projects and grants, those jobs will once again go away and things will return to back to their depressed state. The problem now is, the taxpayers are on the hook to pay back the $800 billion dollar debt while at the same time they need to continue spending the same amount of money as before to keep the economy at its current pace.

How is the $800 billion debt paid back? Remember, the Federal Government doesn’t use their money to pay back the debt because they don’t have any money. The only money they have is your money that they collect from taxes. So what they do is they raise your taxes to pay back the money they spent for you. When taxes are raised, each an every person who receives a paycheck will notice there is a little less money in their pockets. I don’t know about you, but when I have less money in my pocket, I tend to buy fewer things. Those of us who don’t make a whole lot may now have to make a choice on what to buy, how often we go out to dinner, or perhaps how much money gets spent on birthday gifts since there are fewer dollar bills in our pockets.

When the Federal Government takes money away from a couple hundred million people, people have to save longer to make that big purchase or go on vacation. Maybe they don’t go or don’t buy the new car. Maybe they don’t go shopping for fun stuff as often. In return, businesses may start to slow down. Those businesses that were barely making a profit may start losing money. They in turn must cut costs in order to stay in business. They do this in a variety of ways that makes good “business sense”. Perhaps that means cutting back on the number of products they keep stocked on the shelves, which hurts the business they buy their parts/products from. Or they may decide to not pass out raises. Worse yet, they may decide they have to lay people off because they simply don’t make enough profit to cover their employees salaries, health care costs, 401K contributions and social security matching. The longer the economic outlook remains bleak, businesses are less likely to spend money or hire new employees. The money the Federal Government does collect rarely goes to paying back the debt and instead will be infused back into the economy. And so the debate rages; is it better to cut taxes and let the People spend their money on what they want (let the Free Market Enterprise work), or is it better to raise taxes and have the Federal Government decide what to spend their money on (Socialistic Intervention)?

It gets even more complicated. When people are laid off, there is less tax revenue (your money) collected from the working class for the Federal Government to spend or to pay back the debt. An unemployed worker can’t be taxed if they don’t have an income. What can end up happening is the Federal debt grows and the economy continues to slow down because fewer people have money to spend on things, either because they didn’t get a raise, their taxes have been increased, or they no longer have a job. Or perhaps they are just worried about losing their job so they start to save money for a rainy day instead of spending it. Maybe they start paying off debt to better position themselves in the event they do get laid off. At any rate, consumer spending drops and the economy slows down. If the government doesn’t keep pumping money into the economy and neither do the People, then the economy will continue to limp along, especially if there is uncertainty.

… and we come full circle.

The Federal Government will once again feel they have to take out a loan in your name (called a Stimulus or Jobs Bill), spend the money in a way they think it will best help you and the economy, then make you pay it back. So if you go back an re-read this blog and tack on another $800 billion in stimulus, you’ll see we will just go deeper and deeper into debt which will only temporarily stimulate the economy and return the economy to a depressed state.

So, how do you fix this?

There are probably hundreds of ways to fix the economy. Our elected government officials will chose a method makes best sense from a political view. For example, the Liberals/Progressives will find a way to fix the economy such that the people become dependent on them. This may include things like a new Heath Care framework, taking over student loans, taking over Mortgages (Fannie Mae and Freddie Mac), and unionizing the workforce so they can better control wages. in essence, they will take your money and spend it for you. They will in a sense try and take control of the economy. The Conservatives will cut taxes and regulation. This will allow the free market principals to work, however, some companies will take advantage of this. Banks will try to circumvent law by using loopholes, the oil industry may relax standards potentially creating environmental disasters.

In my opinion, the way to fix an economic downturn is to put more money in the hands of the people who drive the economy and create long term employment, not temporary “shovel ready” jobs. As we saw with President Bush, a one time check from good ‘ol Uncle Same did nothing to provide a lasting effect on the economy because it’s temporary. If your paycheck consistently had more money in it, you’d probably buy more things. You may go out to dinner more often. You may save up for a vacation and blow a bigger chunk of money all at once. You may decide to buy a car or perhaps a house because there is a stable increase of money in your paycheck. This in turn puts money back into the businesses, which may have to buy more product to keep their shelves stocked or hire more people to keep up with consumer demand. A long term job will make you more confident about your employment status and you may decide to take out a loan for a new car or home.

The quickest and easiest way for the Federal Government to consistently put more money in your pocket is to lower the Federal income tax, which would be similar to receiving a pay raise. This allows you to spend your money in the way you want to, not the way the Federal Government thinks will best help you and the economy. As a result, you’d see a little more money in each paycheck. But from this comes a variety of arguments, such as how are we to pay back the $800 billion dollar debt if the government is taxing us less? In my opinion, we have two answers to that. One is cut Federal spending. No more stimulus bills, shrink the government, cut defense spending, and cut worthless governmental agencies like Fannie Mae, Freddie Mac, Department of Education, Department of Energy, and the Transportation Safety Board. None of these things existed 30 years ago and have done nothing to improve our quality of life. Depending on who’s in control of Congress and who the President is, they may or may not want to this. Either for political reasons or they don’t want to relinquish the power that money brings. After all, money can buy votes, especially from the large workers unions such as SEIU or the Auto Unions, but explaining this would require a completely different blog post. The other way cutting taxes helps pay back the debt is that people will have more money to spend, businesses will grow which means they have will have greater profits and may have to hire more people. Both of these things translate into more tax revenue for the Federal Government because there are more paychecks to collect taxes from and more profits to tax. But this only works if the Government pays back the debt instead of spending the additional tax revenue on more stimulus bills or new entitlement programs … like ObamaCare.

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