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Obama's New Stimulus: Will it Work?

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There is a lot of debate regarding the President's recent $50 billion plan to invest in America's infrastructure. The main question on everyone's mind is: "Will it work?" The following from The Economist summarizes the arguments in favor of the $50 billion stimulus.

"Infrastructure spending is capital-intensive, but it also has a relatively high multiplier; a dollar spent on infrastructure will be fairly successful at triggering other spending and investment. The lead-time issue is, in my view, overplayed...there are many opportunities for near-term infrastructure stimulus going unexploited. Meanwhile, the time horizon for full recovery stretches on. Full employment may be five years away, and the American economy might not return to its trend level of output...ever. The biggest economic advantage of infrastructure spending is that it represents investments that are probably needed in any case. There would be positive returns to such investments whether or not the economy was weak. That there are ample underused resources at present merely sweetens the deal. Projects can be done cheaply and effectively now, without the risk of crowding out private investment and while providing desperatly needed support for aggregate demand."

The moment you hear the term "aggregate demand" thrown around, you know you're dealing with Keynesian economics. Infrastructure spending itself does not help the economy. The only time it does help is when it ultimately makes us more productive, if it allows us to produce more consumer goods in the future. This would mean the investment in infrastructure is worth the cost, but simply making the expenditure does not help the economy.

The economy has to suffer the cost, either now or in the future. Without the proper production facilities in place, what benefit will it add? The roads may be a little less bumpy, but if no extra consumer goods are moving across them, what good does it do? The argument is that the resources are not currently being used, so this is better than nothing. Why? There is a reason these resources are being underutilized. If they were cost-effective, they would already be in use.

Simply forcing the resources into action does nothing to help in the long-term. You've invested in something that costs more than it adds and any short-term gains in employment are negligible and in the end harmful. Think about it: wouldn't we be better off if we didn't need infrastructure spending at all? Of course we would. So why at a time when our economy is crumbling are we investing in what is essentially a luxury item? Improved infrastructure makes a functioning economy better; it does not stimulate a poor one.

For places that actually do need new infrastructure, it should not be a national priority. The spending should be funded by the states so the money is best allocated. The problem is, when the government makes infrastructure spending, a lot of the funds exist solely to serve political purposes and not economic ones. So, not only is the intended investment not cost-effective, but the funds do not even get allocated to the regions that might benefit; if they do, they make up a small portion of the total expense.

Those who hold the idea that unneeded government stimulus is better than nothing at all share the same line of thinking with those who think WWII actually helped the U.S. economy. The only benefit we received following WWII was a relative one. Considering the rest of the world was blown to pieces, it's no surprise that we outperformed everyone. But that people argue the wasted resources used in fighting Hitler and Imperialist Japan were necessary for America and the world economy boggles the mind. It would have been better if Hitler never existed, if the resources never had to be wasted. Are we really saying that we should sacrifice the rest of the world and put them in the position they were following WWII just to get the U.S. economy back on track? We would be the imperialist country in that scenario.

They see that people got jobs building bombs for the war effort and think "Hey, why don't we stimulate the economy without the negative effects of war?" But they fail to see the job that would have been made if the worker didn't have to build bombs. American citizens had to sacrifice immensely during WWII. The reason? Everyone was making bombs and not consumer products. These people don't just think that guns and butter can be had at the same time, they think that guns can actually turn into butter.

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So, why don't we just have them make consumer products? If doing so was cost-effective, it would already be happening. This is why we have to fix our tax structure, why we must leave the WTO, and why we must restore manufacturing to the United States. Until we make production profitable, no one will want to fund it. Why would they? Any short-term gains would be offset by the longer-term costs, and it would have to be funded with debt.

1942 was the first time the average American paid income tax. Called the Victory Tax, it represented the largest tax increase in U.S. history up to that point. Furthermore, the government borrowed money directly from American citizens to fund the war. Americans purchased government bonds, dubbed war bonds, in record numbers. The war was funded through sacrifice and the wealth America had already attained.

America no longer has the savings necessary to fund a cost of this magnitude. In a recent op-ed for the New York Times, Paul Krugman, a winner of the Nobel Memorial Prize in Economics, called for more stimulus by the government. He said that stimulus in the form of tax cuts is much worse than stimulus in the form of government spending. In reality, without the means to fund it, they are both bad. If the government increases spending without increasing taxes, it still equates to debt. Krugman is essentially arguing in favor of an implosion rather than an explosion. Regardless, you still get devastation.

With no tax increase to pay off government spending, and no savings to fund expenditures, where do people like Paul Krugman want the United States to get all the money for more massive stimulus? Plain and simple: He wants us to borrow it from Japan and China; He may even want us to print it.

Krugman's prescription to get out of this recession is literally right from the playbook of Soviet-style Russia. That's what the Soviet Union did. They printed up a bunch of Rubles, and the government "found" ways to spend it. Did the Soviet Union have any economic growth despite massive "stimulus"? No. Have we learned nothing from history? Apparently.

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As the economy weakens, the only option these Keynesians will fathom is to print money or borrow it. What we're going to get when Republicans win is not gridlock, but something much, much worse: bipartisanship. And the only way bipartisanship works is when you take the worst Republican ideas and the worst Democrat ideas and you combine them into one giant terrible idea.

All we'll get under Republicans is more stimulus. It will be a different kind, most likely in the form of tax cuts, but without a reduction in government spending, which will never happen in a Republican controlled-congress, (in fact we'll probably get spending increases), make no mistake, we'll right back where we started. This is the formula for runaway hyperinflation; this failed formula was used by the Soviet Union, has been used for centuries, and has resulted in nothing but devastation for the country that used it. If we cannot learn from history, we are doomed to suffer its fate.

"If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will
deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered " -Thomas Jefferson-

 

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www.economyincrisis.org

Writes for EconomyinCrisis.org. Attends school at The Ohio State University, part-time, earning a BS in Business Finance.

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Keynesian economics does not work. Can we move on ... by Joshua Sanders on Saturday, Sep 11, 2010 at 10:53:48 PM
The author of this article is obviously a supporte... by liberalsrock on Sunday, Sep 12, 2010 at 9:53:03 AM
Way to make an assumption. First off, trickle-down... by Joshua Sanders on Sunday, Sep 12, 2010 at 10:13:09 AM