Stimulus or Sedative?


Abraham Lincoln once asked an audience how many legs a dog has, if you called the tail a leg? When the audience said “five,” Lincoln corrected them, saying that the answer was four. “The fact that you call a tail a leg does not make it a leg.”

That same principle applies today. The fact that politicians call something a “stimulus” does not make it a stimulus. The fact that they call something a “jobs bill” does not mean there will be more jobs.

What have been the actual consequences of all the hundreds of billions of dollars that the government has spent? The idea behind the spending is that it will cause investors to invest, lenders to lend, and employers to employ.

That was called “pump priming.” To get a pump going, people put a little water into it, so that the pump will start pumping out a lot of water. In other words, government money alone was never supposed to restore the economy by itself. It was supposed to get the private sector spending, lending, investing and employing.

The question is: Is that what has actually happened?

The stimulus spending started back in 2008, during the Bush administration, and has continued under the Obama administration, so it has had plenty of time to show what it can do.

After the Bush administration’s stimulus spending in 2008, business spending on equipment and software fell— not rose— by 28 percent. Spending on durable goods fell 22 percent.

What about the banks? Four months after the Trouble Asset Relief Program (TARP) poured billions of dollars into the banks, the biggest recipients of that money made 23 percent fewer loans than before. A year later, the credit extended by American banks as a whole was down— not up— by more than $20 billion.

Spending in general was down. The velocity of circulation of money fell faster than it had in half a century.

Just two weeks ago, the Wall Street Journal reported, “U.S. banks posted last year their sharpest decline in lending since 1942.” You can call it a stimulus, if you want to, just as you can call a tail a leg.

But the actual effect of what is called a “stimulus” has been more like that of a sedative.

Why aren’t the banks lending, with all that money sitting there gathering dust?

You don’t lend when politicians are making it more doubtful whether you are going to get your money back— either on time or at all. From the White House to Capitol Hill, politicians are coming up with all sorts of bright ideas for borrowers not to have to pay back what they borrowed and for lenders not to be able to foreclose on people who are months behind on their mortgage payments.

President Obama keeps telling us that he is “creating jobs.” But more and more Americans have no jobs. The unemployment rate has declined slightly, but only because many people have stopped looking for jobs. You are only counted as unemployed if you are still looking for a job.

If all the unemployed people were to decide that it is hopeless and stop looking for work, the unemployment statistics would drop like a rock. But that would hardly be a solution.

What is going on, that nothing seems to work?

None of this is new. What is going on is what went on during the Great Depression of the 1930s. Money circulated more slowly during the 1930s than during the 1920s. Banks lent out a smaller proportion of the money they had on hand during the 1930s than they did in the 1920s. Anti-business rhetoric and anti-business policies did not create business confidence then, any more than it does now. Economists have estimated that the New Deal prolonged the depression by several years.

This is not another Great Depression, at least not yet, and the economy may recover on its own, if the government will let it. But Obama today, like FDR in the 1930s, cannot leave the economy alone. Both have felt a need to come up with one bright idea after another, to “do something.”

The theory is that, if one thing doesn’t work, it is just a matter of trying another. But, in an atmosphere where nobody knows what the federal government is going to come up with next, people tend to hang on to their money until they have some idea of what the rules of the game are going to be.

  • John C. Davidson

    Anymore, everything done in Washington has to carefully analysed for as the money supplies dwindles, so to does those in power find ways to get the bulk of what is left. There just doesn't seem to be any scruples left in how it is done. I really doubt if any pension or retirement funds are covered privately. And the government will complete the bailout at the cost of individual freedom.

    Once again, Dr. Sowell spells it out very plainly.

  • http://intensedebate.com/people/bubba4 bubba4

    "The stimulus spending started back in 2008, during the Bush administration, and has continued under the Obama administration, so it has had plenty of time to show what it can do."

    The TARP was not "stimulus". Bush's "stimulus" consisted of giving tax cuts on capital gains and for people that already had plenty of money….then launching expensive wars that were suppose to pay for themselves.

    "Economists have estimated that the New Deal prolonged the depression by several years."

    What economists?….bizarro world economists?

    • Phil Byler

      The difference between TARP and tax cuts is the difference between day and night. It is corect to write that TARP was not stimulus. Government bailouts and Government deficit spending do not stimulate the economy and did not in the case of TARP. Keynesian macroeconomics is flawed theory. In contrast, the GW Bush tax cuts did result in a stimulated economy, just as they did during the 1980s during the Reagan Administration and during the 1920s during the Harding-Coolidge Adminsitration. Hayek had it right.

      As for GW Bush "launching wars," we went into Afghanistan after we got attacked on 9/11 because that is where al Qaeda was headquartered. We went into Iraq to remove a brutal, terrorist supporting dictator after Congress, with strong Democrat support, passed an authorization to use force act that cited 22 causes of war, including Saddam's violation of 17 U.N. arme resolutions and including WMDs that Iraqi General Georges Sada has said and written Saddam did have and for which Saddam had the raw materials at the time of the invasion — which is why the NY Times reported in July 2007 that 550 metric tons of yellow cake uranium was shipped out of Iraq (yes, Saddam went uranium shopping in Africa).

      • http://intensedebate.com/people/bubba4 bubba4

        The difference between TARP and tax cuts is the difference between day and night.

        Yeah, that's why it's in quotes…it's not a stern serious point…I'm having a bit of fun.

        "It is corect to write that TARP was not stimulus."

        Yep. Tell it to the writer of this article.

        "In contrast, the GW Bush tax cuts did result in a stimulated economy, just as they did during the 1980s during the Reagan Administration and during the 1920s during the Harding-Coolidge Adminsitration. Hayek had it right."

        So they stimulated us into deeper debt? What stimulating effect are you talking about? We just passed through the result of Bush's policies.

        Iraq was not a war of necessity and defense…and I noticed you washed away any thought of WMDs because it doesn't help the case. That is why we HAD to go into Iraqi RIGHT THEN….remember? After all the evidence, some of which is still coming out…you're going to stick to this version of the story. If you think Saddam had uranium or WMDs or you believe all this stuff then you are debunking proof.

    • Joel

      Really? I have a textbook for middle to high school students that shows two graphs. One shows that from 1930-1939, the only year that Government expenditures did not exceed income was 1930. After that, it was spend, baby spend. The next graph in the text. In the same textbook, unemployment that year was the lowest of the decade as well, at about 2.5 million. In the years of highest government spending, unemployment NEVER dipped below 6 million, and in fact hovered between 8-10 million for most of the decade. Now, I know that the textbook publishers are not "bizzaro world economists" and that no one that has seen a textbook in the last 20 years would accuse textbook authors of being right wing extremeists. So even my high school kids understand that government spending DID NOT get us out the depression, it took a world war to do this.

    • BatChainPuller

      "Economists have estimated that the New Deal prolonged the depression by several years."
      "What economists?….bizarro world economists?"

      Don't do much readin' outside of yer religion, do ya Bubba?

      Amity "Bizzaro World" Shlaes to name one published this year.

  • http://intensedebate.com/people/temarch temarch

    The government is trying to give a $5000 credit to businesses who hire people who are unemployed. What a laugh. Businesses don't just hire people because the government wants them to. The government is pushing banks to loan money to businesses. Businesses don't borrow money because the banks want to loan it to them. Businesses have to justify each and every investment they make. You don't borrow money or hire people until you have sales that will generate income or studies or research proving same. $5000 would only pay for a few weeks or months of an employee, and then the cost of that employee is only a drain on a company that has no business to justify having that employee. If they have the business to justify the hire of a new employee or the borrowing of capital, then the company needs no prompting from the government. It only needs assurance that the government won't interfere.

    • http://intensedebate.com/people/bubba4 bubba4

      Before you laugh to much, you should at least understand the point. Giving a credit to a company that brings in new employees is to encourage companies that want to hire more people but maybe can't afford it…to go ahead and do it.

      What company would just hire a person for no reason to get a $5000 tax credit?…that's idiotic…which you are happy to jump all over.

      "Businesses don't borrow money because the banks want to loan it to them."

      Yeah no sh*t..who is making such a claim.?The point is to supply the backing so banks will loosen up and give businesses the loans they need in the first place. Businesses borrow money because they need it. In today's environment, you better have a house to borrow against or you aren't getting anything….even if you have a contract you need a loan to fulfill.

  • USMCSniper

    bubba4 is just about the stupidest babbling intellectual;y inept fool that posts here. He is so stupid that he doesn't even suspect he is stupid. Here is some remedial education for pathetic bubba4:

    Henry Morgenthau, Jr. was FDR's Secretary of the Treasury from 1934-1945. In the following important quote, he admits that the big New Deal stimulus spending programs had failed. (p. 2) We have tried spending money. We are spending more money than we have ever spent before and it does not work. And I have just none interest, and if I am wrong . . . somebody else can have my job. I want to see this country prosperous. I want to see people get a job, I want to see people get enough to eat. We have never made good on our promises. . . . I say after eight years of this administration we have just as much unemployment as when we started . . . . And an enormous debt to boot!

    Folsom, Burton W., Jr. In New Deal or Raw Deal? How FDR's Economic Legacy Has Damaged America. 4th ed. New York: Threshold Editions, 2008.

  • gpcase

    Consider this: if you were a manufacturer and your sales dropped, how would you adjust to improve your cash flow to stay alive? If you answered "cut prices and wages," you'd be correct. Except that was now forbidden (until the Supreme Court ruled it unconstitutional in 1935, but the damage was done) so the only recourse was to cut production and lay off even more workers to stay viable. Later the Fair Labor Standards Act replaced the NRA as the principal tool to stifle profit-making. It provided federal support for unions which had the effect of further tying the hands of industry. FDR may have been a great wartime president, but in terms of economics, he was the worst president in US history.

    Bubba4…Does this help?

  • gpcase

    The Henry Morganthau quote confirms that the New Deal didn't work from an insider. But it may be healpful for Bubba4 to know why. The money supply expanded during the '20s and created a bubble, which led to overproduction, deflation and a stock market crash, in that order. In the early '30s, the money supply contracted, as Dr. Sowell correctly points out, as the Federal Reserve stood idly by as several thousand banks went under.
    Why they allowed their competition to go under is self-evident.

  • gpcase

    In addition, taxes were raised which had the effect of draining what little investment capital remained, and the infamous Smoot-Hawley Tariff Act caused international trade to collapse. FDR replaced Hoover and made a bad situation even worse. Taxes were raised to 78%, contracts tied to the price of gold were voided (some say it amounted to the greatest theft in history), and he launched a number of ineffective or counter-productive programs, the worst of which was the NIRA (National Industrial Recovery Act). This effectively froze wages and prices in an attempt to keep up demand and benefitted larger, politicall-connected businesses over smaller ones (sound familiar?). The bottom-line is that onerous, ill-conveived government regulations prevented businesses from becoming profitably again.

    • http://intensedebate.com/people/bubba4 bubba4

      Yes of course…a quote confirms it…it didn't help…it hurt us.

      Here's the thing…I know UCSniper believes in anything that supports his view of the world (which is very stilted) and rejects outright as propaganda anything that doesn't. Talking to him is like beating a zombie with his own arm…it can be amusing, but in the end you don't get anywhere. But, he is a brilliant scientist with a PHD in physics….so maybe I should take any snippet he drags out as gospel.

      Stimulus isn't just to make more jobs. In the case of latest Stimulus bill, many states would have been unable to provide unemployment past a certain date, or most any other service. So, you can say that this Stimulus was worthless because of whatever factors you want…but because we didn't have to live through the result of no stimulus, you are only speculating on an alternate universe where things just worked out great regardless…when left to the "market" which was falling apart because of "government"…lol…whatever.

      It's even easier to say the New Deal did nothing and is a worthless…one it falls perfectly in line with what FPM propigates everyday. Hitler was a liberal, New Deal was a sham, global warming is a fraud…etc…but it also a long time ago…

      So no jobs were created, no lives saved, no one's life made better…it was just a catastraf*ck that not only caused the Great Depression but made it longer…why oh why won't the government get off the backs of the industrialist that are trying to save this country!!!! WHAAAA!!!!

      "The bottom-line is that onerous, ill-conveived government regulations prevented businesses from becoming profitably again."

      Sure…why not? You already believe this as a principle…so naturally if an example supports, even if misinterpreted and wrong, then it's in. I don't believe in a black and white principle about government=bad, corporations (or just "business")=good. So when I look on history or anything else, the facts don't become a bizarro world theory that flies in the face of common understanding and the opinions of a vast majority of economists. Not just that…you can't read history like an excel sheet….especially if it's in Discover the Network.

      • BatChainPuller

        Straw man, much? All of your histrionics flow from a simple in-artful assertion.

        "Economists have estimated that the New Deal prolonged the depression by several years."
        What economists?….bizarro world economists?

        Then, predictably, Godwin rears his ugly mug.

        • http://intensedebate.com/people/bubba4 bubba4

          Yes, I often call FPM a bizarro world…it's my nickname for the alternate reality required to believe some of the things written on this website.

          If you mean Godwin's law or something along those lines, I don't see it….but you've probably been waiting to use that comparison on someone…so get it out. Bizarro world is part of a comic book universe and is hardly extremist hyperbole….lol

          I know the tendency is to go to unemployment data or something, but the overall narrative is that spending does not help…did not help…and that stimulus is a sedative. So what is the strawman exactly…gpcase goes even further with just how bad "the New Deal" was…

          So, I'm not sure how I am making a strawman out of it. He's certainly not coming to it's defense…lol

  • http://intensedebate.com/people/bubba4 bubba4

    Yeah, Fair Labor Standards and the Equity Pay Act really set us back as a society. The real tragedy was when the government wouldn't let kids work in the coal mines anymore.

    If in power, you three would end up making a Dystopian world like in "Robocop" a strange fascist-oligarchy. You look back on our steps into a more civilized society as obsticles and setbacks.

  • gpcase

    Bubba4, your comments indicate you don't fully understand how a market economy works. No wonder you think conservatives live in a bizzaro world – your assumptions are based on, as you allege, a "common understanding and the opinions of a vast majority of economists."

    The discipline known as Economics has been weighted down for better than 100 years with a misleading premise: that supply and demand and the distribution of labor and resources are givens, that they simply exist in a vacuum, and can be placed into clever mathematical formulas to predict outcomes. Moreover, that an altruistic code of morality justifies government's right to decide who ought to have how much of the "surplus" of wealth. The assumption is that the factors of production exist independent of man's rational mind and that the producer does not really own it outright ,but is allowed to reap the benefits of his mind, his risk and his effort based on the government's whim.

    • http://intensedebate.com/people/bubba4 bubba4

      I didn't say "conservatives" live in a bizarro world….but you can call yourself whatever you want, you don't have special relationship to the market economy or economics in general.

      "- your assumptions are based on, as you allege, a "common understanding and the opinions of a vast majority of economists."

      Well..yeah, but cut me some slack for condensing a bit when typing into these little windows. The rest of your post, I don't get…what is your point? The rich are getting richer and the poor are getting poorer…the Supreme Court just gave corporations rights only people should have and we just had to bail out major financial institutions. I don't see this altruistic code of morality at work in the last 30 years.

  • gpcase

    This assumption of who commands the distribution of scarce resources and the resultant wealth paved the way for Keynesian economic fallacies about the efficacy of government taxation and spending, its predictive effect on counter-cyclical demand and that a redistribution of resources would not undermine the free market's ability (i.e. a free people engaged in voluntary exchange) to continue to produce and innovate.

    Either man is free or he is a servant of some collective. I strongly encourage you to reevaluate your basic premise to determine where you stand – on the side of a free people served by a limited government, or as a serf whose wages are expropriated to serve the needs of the collective.

  • 080

    The present plan is to cut off a foot and feed it to the patient. It tastes delicious. But just wait until he tries to walk.