Saturday, August 4, 2012

Why government stimulus isn't what it used to be

Many Keynesian economists, including the folks in the current U.S. administration, believe that stimulating a down economy is a simple matter of spending enough money. When the private sector slows down, the government fills the gap by spending more, and they don't much care what the money is spent on, just spend it.  They point to government spending and jobs programs in the 40's and 50's as proof that such stimulus can be effective. The problem is, this isn't the 40's and 50's and it wasn't the spending in and of itself that helped the economy.

The most obvious difference between then and now is the number of people required to do a large project. Back in the day, building a highway or a dam or a bridge required hundreds or even thousands of individual workers. These days the same projects can be done with dozens. That's why our nearly $1 trillion stimulus program resulted in only a handful of jobs at a ridiculous cost per job. Furthermore, with all the regulations and procedures put in place in the name of protecting the environment and workers and whatever else requires extensive study, just getting a project underway can take many years. Even President Obama learned that, and lamented that the jobs weren't as "shovel ready" as he thought.

If roads and bridges need to be built, updated, repaired, so be it. But that's not going to create a bunch of jobs or pull the economy out of recession. There just aren't enough people involved and the time period is too spread out.

Another difference between then and now is that, for the most part, public works projects were things that were actually in demand and that furthered the engineering and manufacturing revolution that came about due to World War II. There was the Trans Alaska Highway and the Hoover Dam for example. These were not roads to nowhere or speculation on technology that had not been proven in the market place.

So what's a government to do if simply spending more money isn't going to get the job done? There's really only one path left. There are thousands of small businesses within 20 miles of my house. If each had the confidence and optimism to hire one worker, that would be one heck of a jobs program. They don't need hand outs, or programs or grants from the government. They just need fewer regulations, less paperwork and the flexibility to negotiate with employees for pay and benefit packages that work for both, rather than with a government that's not involved in any aspect of the production process, except for those that slow it down and make it less efficient.

Government trying to control and direct the free market is like the Lenny character in "OI Mice and Men", and the free market is a bunny rabbit. Put the bunny down and give it some room to run before you do something you can't undo.

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