We of course hear all the time that the government has to “help” the economy, or “prime the pump.”
The problem is that it’s a lie — not due to intentions, but due to what has to happen for it to work as claimed and intended.
Let’s first define “Stimulus” and “Work”:
“Stimulus”: A deficit spending bill or bills by government — intentionally borrowing money to spend it in excess of tax revenues for the purpose of attempting to foster economic growth.
“Work”: A Stimulus program can be said to have “worked” if it produces more than it costs in tax revenue. That is, it “works” if it produces economic change sufficient to fund itself over a reasonable amount of time. If it does not then the program must be deemed a failure, since it is impossible to sustain it permanently and yet the desired goal will not come to pass; at best a temporary substitution — not stimulus — can be obtained.
Let’s look at history in terms of percentage of GDP:
Pay careful attention to this chart. Note that government tax revenues are about $2 trillion, more or less. We’ll be kind and call it $2.5 trillion (the last couple of years it has fallen short.) This means that the government taxes about 17% of GDP.
Therefore, the reciprocal of that percentage of GDP that shows up as tax revenues must be the multiplier of economic activity of the “Stimulus” in order for it to be revenue neutral!
That is, each dollar of deficit spending must produce about six dollars of new economic activity in order for the amount of tax revenue generated from that stimulus to offset the spending that took place.
This has never happened. Ever. Even the most-generous of economic estimates on stimulative spending have left the multiplier below 2.0. Yet a 2.0 multiplier would require that government tax half of GDP for it to be neutral!
This is the fundamental reason that all of the “stimulus” program attempts to lift the economy out of recession over the last 30 years instead fueled the debt bubble. The only “pump” they primed was the one marked “Leverage“!
The Keynesian view of “pump priming” isn’t wrong because it is too small or misdirected, it is wrong because there is no reasonable program that the government can put into place that will have an economic multiplier of 6 in the real economy.
As such these programs “worked” in the 08-11 timeframe through substitution only and have never been self-sustaining — even in the 1980s and 1990s.
This is the fundamental flaw in attempting “stimulus” measures; the only exception would be were you to first run a surplus and bank it — you could then spend that without debt consequence. Unfortunately that course of action — to run and bank surpluses in anticipation of future need — has never been taken by our government.
As debt saturation is reached it becomes even worse. Now there is no ability to drive consumer and business behavior to take on more debt — that is, instead of producing more pyramiding of debt in the private economy all the “stimulus” does is directly go to GDP, meaning that 2/3rds to 5/6ths of the “stimulus” literally winds up as new and unfunded debt on the federal balance sheet!
The harder and faster you dig the deeper the hole gets!
Sorry Krugman, Obama, Reid and others: The math always wins.