January 8, 2010 | By Amanda Reinecker

The Stimulus Myth

Despite the startling job figures released this week, there are signs that the nation's economy is finally starting to improve; the end of the recession may be in sight. But why is the economy improving, and is this improvement sustainable?

Many on the left are hailing the President's $787 billion "stimulus" package as the key behind the budding economic turnaround. These same folks support the President's proposal for a third stimulus spending package to give the economy a final boost into recovery. But they are missing one critical point: as Heritage Foundation economist Brian Riedl explains, "government spending does not stimulate economic growth." 

In a new analysis, Riedl debunks liberal myths about stimulus spending, details the long history of failed stimulus packages and provides sound alternatives that offer real economic revitalization.

THE MYTH: GOVERNMENT CAN SPEND ITS WAY INTO PROSPERITY

Stimulus advocates make what is, on the surface, a plausible argument. They often attribute recessions to a decline in production, which in turn results from a decrease in individual spending. Increased government spending, they argue, can make up for this shortfall in individual spending and prop up production levels.

But stimulus spending doesn't actually increase productivity. Instead, Riedl argues, it "often reduces long-term productivity by transferring resources from the more productive private sector to the less productive government."

Those who support government stimulus packages fail to ask one very important question: What money is the government actually spending? Riedl points out that "every dollar Congress injects into the economy must first be taxed or borrowed out of the economy." It is not new money. It is money that is redistributed out of the private sector via taxes and into projects favored by politicians and bureaucrats.

Stimulus spending, in short, is like "removing water from one end of a swimming pool and pouring it in the other end." In the end, Riedl explains, "it will not raise the overall water level."

A CONSISTENT HISTORY OF FAILURE

"The idea that increased deficit spending can cure recessions has been tested repeatedly, and it has failed repeatedly," Riedl says. Here are just a few of the failed stimulus packages of the past.

• 1930s. New Deal lawmakers doubled federal spending—yet unemployment remained above 20 percent until World War II.
  
  
• 1990. Japan responded to a recession by passing 10 stimulus spending bills over eight years (building the largest national debt in the industrialized world)—yet its economy remained stagnant.
  
  
• 2001. President Bush tried to boost the economy out of a recession by "injecting" tax rebates into the economy, with little effect. In the end, it was the 2003 tax rate cuts that allowed the economy to recover.
  
  
• 2008. President Bush tried to head off the current recession with another round of tax rebates. The recession continued to worsen.
  
  
• 2009. The most recent $787 billion stimulus bill was intended to keep the unemployment rate from exceeding eight percent. In November, it topped 10 percent. In short, "the stimulus bill failed by its own standards."

THE SOLUTION: IT'S NOT A STIMULUS BUT IT'S SURE TO STIMULATE OUR ECONOMY

As December's job figures indicate, the recession is not over yet. But economic recovery is inevitable, with or without a stimulus package. Our economy contains built-in, self-correcting mechanisms that enable it to adjust naturally to market changes. However, our elected leaders should understand that government intervention can disrupt this process and stall recovery.

Legislators should consider policies, such as permanent tax rate cuts, to encourage more business investment and economic growth. "The only way to increase economic growth," argues Riedl, "is by increasing productivity and the labor supply." Increasing the production of goods and services, not redistributing taxpayer money, is the key to economic recovery.