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By Attorney Steve Grow
26, 2011

I have been slow to catch on to this, but there is an incredibly misleading view about that any government spending is a stimulant. In an press conference early in his administration, Mr. Obama thought this so obvious that an expression of doubt or a contrary view merited a presidential "Duh!!". Well, after seeing the non-results of trillions in stimulus and other government spending under Bush II and even more under Obama, I am afraid the "Duh!!" moment is on Mr. Obama and his friends (and on George W. Bush and his friends who thought and acted similarly). And on the science of economics and those prominent economists who have been teaching and pushing this view for so long. We have been in incredibly incompetent hands, in this area, since at least 2001. The New Zealanders, who hold a different view, are right. Here’s why.

The view might hold water if the government were spending from an accumulated surplus which it had been holding in a mattress somewhere. However, the view holds absolutely no water if the money spent is newly borrowed--as all or most of our "stimulus" and other deficit spending has been. Why? Because in the step of borrowing, an equal amount of money is removed from the world and US economy before being put back in. Neither Obama and crew (nor Bush and crew before them) can rationally claim that this removal of funds is not antistimulative --TO EXACTLY THE SAME EXTENT THAT MERE SPENDING IS CONCEIVED OF AS STIMULATIVE. $X in, $X out. Net result: zero.

If there were no transaction costs in the borrowing, the antistimulative effect of the borrowing exactly counterbalances the supposed stimulative effect of mere spending. If you take a cup of water out of one end of a swimming pool and pour it in at the other end, you will never make the pool overflow.

All the deficit spending adds no net amount to the economy. Therefore, only in the rare case where government deficit spending happens to move money to an economically more productive use, no net improvement in the economy can be expected to automatically ensue. Moreover, several of the stimulus bills projected spending lots of money not immediately but over time. If it is borrowed first and spent only later, then a profound antistimulative effect will occur in the meantime. In the swimming pool analogy, this would be where a person takes money from one end of the pool and holds it in the bucket on the side for some time without pouring it back in. (Now, the intent and practice may have been to actually do the borrowing just before the spending occurs, and if so this would reduce the impact of this observation,)

To repeat the vital equation: $X in plus $X out equals $0 net stimulus.

Any other view deserves a prolonged "Duuhhh!" from anyone with a shred of common sense. Where did some of these people acquire their education in thinking or in consulting the real world from time to time for evidence as to whether or not their approaches work? I wouldn't send my kids there.

Now there are powerful interests who want to believe, at almost any cost, that Keynes was right, that spending in excess of income is inherently helpful to the economy. First are the politicians, who want political cover for their irresponsible and (I believe) usually harmful, overspending, and for increasing their stranglehold on the private economy. Second, are those who get on the government payroll somehow for this overspent money—like it or not, this includes most of us to some degree. This not only includes recipients of transfer payments, but also all those Wall Street and banking interests who profit handsomely from handling the issuance of, and trading in, government debt. The more government debt there is, the better for them. Indeed, the fees and costs associated with their services is part of the reason that when one puts money into the bucket in one end of the pool and then moves to the other end of the pool to empty it, there is less water to pour back into the pool than was taken out in the first place. (Of course, some of these folks user their cut to build their own swimming pools.)

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If anyone knows of any convincing evidence that Keynesian economic policies have ever worked for a country, anywhere, I would like to hear it. I really would. It has certainly never worked, so far as I am aware, in the United States when tried seriously.

A further observation, if much of the water in the pool is constantly being moved about in buckets, those in the pool do not have as stable a source of available capital from which to draw if they see good opportunities. (Governments, as a rule, rarely spot a good economic opportunity. Rather, they tend to get into the picture when the private sector has already determined that a particular thing is not yet practical. )

� 2011 Steve Grow - All Rights Reserved

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Steve Grow holds degrees in physics, law and philosophy. He is a retired lawyer who practiced business law for many years. He studied philosophy and cognitive psychology at the graduate level, including working with one of the world’s leading scholars on the work of Aristotle. He was co-editor in chief of his college newspaper. He has observed and wondered about history, psychology, religion, politics, journalism and good (and bad) government since childhood.

He believes that, now and always, the central problem in politics is monitoring and governing those in political positions—so that ordinary people are the ultimate governors and can hold those in office fully accountable. Ordinary people deserve, and need, full legal protection of their privacy. In contrast, all activities of those in government should be open to full scrutiny at all times. In a certain sense, ordinary people should be “ungovernable” and accorded a broad measure of privacy – on the other hand, politicians and their actions should be open to monitoring, closely watched and constrained. Anyone with a contrary view, he believes, is an enemy of freedom—wittingly or unwittingly.

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The view might hold water if the government were spending from an accumulated surplus which it had been holding in a mattress somewhere. However, the view holds absolutely no water if the money spent is newly borrowed--as all or most of our "stimulus" and other deficit spending has been.