This commentary aired on National Public Radio’s All Things Considered on January 16, 2008 in response to much talk about the need to create a stimulus package to avert a recession. Audio is here…
Love that word—stimulus. It sounds so scientific. With the right stimulus, you can even make the leg of a dead frog twitch. A heart attack victim gets the stimulus from those chest paddles and bam. Back to life. My online dictionary defines stimulus as something that "rouses or incites to activity." Sounds like the perfect prescription for an ailing economy.
But if politicians know how to stimulate the economy, why wait for a recession? If you can make the economy grow, why wait for bad times? One answer is that a healthy patient doesn’t need medicine. But the other possibility is that it’s all hot air. Maybe we don’t know how to make a $14 trillion economy move very quickly. And if we did, it would take a lot more than an injection of even 125 billion dollars.
There’s that scientific language again—an injection. The politicians are always going to inject some amount of money into the hands of consumers and into the economy, like a doctor giving a lifesaving blood transfusion. But where does the economic injection come from? It has to come from inside the system. It’s not an outside stimulus like the chest paddles or the transfusion. It means taking money from someone or somewhere inside the system and giving it to someone else.
The standard stimulus package doesn’t change incentives. It’s a check from the government. The hope is that the receiver will spend it. But when you just send out checks from the government, whoever gets stimulated is likely to be offset by someone who gets unstimulated.
The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they’ll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It’s like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn’t get any deeper.
And even the people who get the money often save more of it than they spend.
That’s why stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician’s approval rating.
I’m not saying that economy policy is irrelevant. Economic policy matters because it affects the long-run growth of the economy. I’m all for policies that make us more productive or innovative by changing incentives. But those policies take time. There’s little any economic doctor can do to move our $14 trillion organism of an economy in the next few months.
Politicians who work in the Oval Office—or those who seek to work there—would be wise to remember that patience is a virtue. Focus on the policies that lead to growth over time. Expecting results overnight is bound to lead to disappointment.
Russell Roberts is a professor at George Mason University and a research fellow at Stanford University’s Hoover Institution. He hosts the weekly podcast series, EconTalk. He also blogs at Cafe Hayek.