"If people would say to me, 'Would you rather recover or be stimulated?' I think I'd rather be stimulated." - Rep. Barney Frank, Department of the Treasury Office of Thrift Supervision National Housing, December 8, 2008.I've been thinking on this for a long time. Stimulating the economy in rough times clearly used to work. It worked somewhat in the Depression (although the tax cuts were quickly erased when Hoover tripled the tax rate to 63% in 1932) and it worked in the Reagan era, particularly in the 1982 recession. G.W. Bush has tried both direct checks and tax cuts and, with the exception on the cut in the tax on dividends and capital gains, they haven't done much. Let's look at this a little more.
Economist John Maynard Keynes proposed his approach to stimulating the economy by increasing demand through the injection of money at the "bottom". (called "Keynesian Economics" or "Keynesian Theory", in case you want to look smart at your next block party)
It seems that every politician of every stripe the world over accepts this theory, without paying much attention to the fact that it seems not to work. For people ambivalent to government spending at least, it seems like a sound idea. Why doesn't it work?
Here's my primary theory, and I'll follow that up with an alternate theory. Just in case.
In a factory economy, things were produced and consumed within the borders of a nation. Stimulating demand would give people money to buy those products, which translates into increased orders at the factories that provided employment.
In a post-industrial economy, where global tranportation systems and multinational trade agreements, more and more consumer products are imported. This means some of that stimulus money goes to "locals" - the guy at the TV store, the guy at the car dealership, etc.
This is a natural evolution of economies. I'm not arguing that we need to preserve the factory economy of old. But it does seem to indicate that pumping money into people's hands is just not going to have the intended effect. It simply create a double-speed money pump to move US wealth overseas. (by both selling bonds to get the money for the stimulus and from the money leaving the country)
Alternate theory
Most Americans live live's full of debt. You have people rolling in car loans and credit card debt into their mortgage refi - which means they are paying for the Taco Bell lunch from a couple months ago for 30 years! Insanity. So if they get a few extra dollars, they pay a bill with it. Paying old bills is better than NOT paying them, but it won't stimulate the economy. The extra money simply vaporizes immediately.
