Spending Doesn't Stimulate
by Brian Riedl
Issue 121 - December 3, 2008

Congress wants to pass a stimulus package of up to $300 billion. 

Yet in the last year, hundreds of billions in “emergency” spending and $150 billion tax rebates all failed to jumpstart the economy. Massive deficit spending has failed to jumpstart the economy.  So why would the next spending stimulus plan suddenly succeed?

The problem is that government “stimulus” is based on an incorrect economic model.

Government stimulus bills are based on the idea that Congress can “inject” new money into the economy, increasing demand and thus production. But where does government get this money? Congress doesn’t have a vault of money waiting to be distributed. Therefore, every dollar Congress “injects” into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It’s merely redistributed from one group of people to another.  

Even redistributing from “spenders” to “savers” ignores the fact that nearly all savers either bank or invest their savings, where it is then spent by others.

Governments cannot create new purchasing power out of thin air. The only way to provide sustained economic growth is by increasing the productivity of the American workforce. And yet Congress’ stimulus proposals generally ignore productivity.

Brian Riedl is Grover M. Hermann Fellow for Federal Budgetary Affairs at The Heritage Foundation.  For his full article on “Why Government Spending Does Not Stimulate Economic Growth” go to   http://www.heritage.org/Research/Budget/bg2208.cfm   (then click “print this page” for the pdf version)