ECONOMICS 101 FOR DUMMIES, ESPECIALLY FOR DEMOCRAT AND REPUBLICAN DUMMIES IN CONGRESS AND THE WHITE HOUSE

'We have tried spending money . . . and it does not work' -- Treasury Secretary Henry Morgenthau Jr.

RESPONDING TO my recent column about the bloated “stimulus” package making its way through Congress, one reader argued that what matters most right now is getting money into people’s hands.

John Maynard Keynes

“In the face of rapidly rising unemployment and idle productive capacity, any kind of federal spending will have a stimulus in the short run,” he wrote. “Digging holes and filling them in would help to create jobs and consumer demand because those wielding the shovels would earn a paycheck that they could spend.”

More than 70 years ago, John Maynard Keynes argued much the same thing -- that government spending on anything -- “pyramid-building, earthquakes, even wars” -- was bound to generate a beneficial stimulus. The important thing was to pump money into the economy. Why, the government could spur economic growth, Keynes famously wrote, even if all it did was “fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again.”

Keynes died in 1946, but the Keynesian fallacy -- that money for nothing (increased spending without increased productivity) can boost the economy -- lives on, seemingly impervious to the evidence disproving it. To be sure, many economists dismiss it -- several hundred of them, including Nobel laureates Edward Prescott, Vernon Smith, and James Buchanan, issued a public statement last week calling it “a triumph of hope over experience to believe that more government spending will help the US today.” But experience didn’t dissuade 244 House Democrats from passing President Obama’s massive spending bill, just as it didn’t dissuade President Bush from signing last year’s expensive “stimulus” legislation.

Here is a question for Washington’s Keynesians: If uninhibited deficit spending is the key to economic growth, how could the Bush administration’s galloping budget increases and unbroken string of deficits have left the economy in recession? Indeed, if Keynes was right, why didn’t the enormous growth of government outlays stop the Great Depression in its tracks? Federal spending exploded under Herbert Hoover -- in the space of a single year (1930-31), the government’s share of GNP ballooned from 16.4 percent to 21.5 percent -- and exploded even more under Franklin Roosevelt, during whose first two terms the federal budget more than doubled. Where was the “stimulus” such furious expenditure should have produced?

Incredibly, the lesson Obama has drawn from history is that past administrations didn’t spend enough. In his meeting with House Republicans last week, he argued that FDR should have thrown open the sluices even wider. “The real problem was that Roosevelt slowed down on public spending in the first two years,” the president said, according to one congressman who was in the room. “If he’d just kept on spending that money, we’d have gotten out of the Depression quicker.”

There may be no reasoning on this subject with Obama, who has already raised the possibility of “trillion-dollar deficits for years to come.” But reality is not optional: You do not become more prosperous by writing yourself a check. Economic growth results from creating new wealth, not redistributing existing wealth. The federal government cannot conjure prosperity out of thin air. Any money it spends -- whether on highways or Pell grants, Medicaid or tax rebates, arts subsidies or mass transit -- it must first tax or borrow from somewhere else. A trillion dollars pumped into the economy tomorrow is a trillion dollars siphoned out of the economy today -- and therefore a trillion dollars no longer available to the private sector for investment or consumption. Enlarging Washington’s spending power will not enlarge the economy. Only work, investment, and production can beget economic growth.

Six years into FDR’s presidency, his Treasury secretary (and close friend) Henry Morgenthau Jr. ruefully acknowledged that the New Deal had proved an economic disaster.

"We have tried spending money; we are spending more than we have ever spent before and it does not work," he told senior congressional Democrats. "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. . . . After eight years of this administration we have just as much unemployment as when we started . . . and an enormous debt to boot!"

A new New Deal will not work any better than the old one did. Recessions hurt, but recessions compounded with colossal government growth hurt worse. So much worse, sometimes, that they turn into depressions.

(Jeff Jacoby is a columnist for The Boston Globe.)

Money for nothing won't grow the economy

by Jeff Jacoby
The Boston Globe
February 1, 2009

http://www.jeffjacoby.com/3395/money-for-nothing-wont-grow-the-economy