What government stimulus stimulates

It might come as no surprise that the Obama-Reid-Pelosi stimulus bills have been colossal failures. What might surprise you, however, is that sound economics demonstrates no other outcome is possible.

In a free market, consumer spending patterns determine the array of goods and services produced. Changes in consumer preferences cause changes in relative prices, which in turn give rise to profit opportunities. Businesses take advantage of these opportunities by cutting back the production of relatively lower-priced goods in favor of relatively higher-priced goods consumers now prefer. Competition hastens the adjustment process, promotes efficiency, and drives down prices.

Stripped to its essentials, the market can be thought of as the process in which producers, guided by price changes, continually adjust the allocation of resources in order to supply the mix of goods and services that best satisfies consumer demands.

In February 2009, Congress passed, and President Obama signed into law, the “American Recovery and Reinvestment Act” (ARRA): an $862B “stimulus” bill ostensibly crafted to rescue America from recession. The bill authorized about $500B of new spending through 2012.

Cash for Clunkers” (CARS), was a government-funded rebate program that offered up to $4,500 to buyers who traded in older vehicles for new ones. During the summer of 2009, nearly 700,000 eligible cars and trucks were traded in, at a cost to taxpayers of just over $3 billion.

In August of 2010, Congress authorized another $26B in new spending to stimulate the hiring of teachers and administrators.

How do these kinds of spending programs affect the economy? What exactly do they stimulate?

Vote buying and influence peddling

When government announces $500B in new spending, unions, corporations and other special interests will try to secure a slice of the pork by increasing their lobbying expenditures and political contributions. The bigger the stimulus, the more money will be spent buying influence and the less will be available for investing.

In union-dominated industries, unions will attempt to capture stimulus dollars directly because they are better positioned than corporations to reap the lion’s share of the haul.

The transfer of wealth from ordinary citizens to special interests

In 2008, unions gave about $75 million to federal candidates and parties, with about 92% of it going to Democrats. Although unions make up only about 12% of U.S. workers, roughly half of all stimulus spending authorized under Obama will flow through union-controlled entities.

Unions extract above-market wages by restricting the labor supply. The rise in labor costs chokes production and raises prices. Stimulus-induced increases in union compensation come at the expense of non-union labor, in the form of lower wages, and consumers, in the higher prices they must pay for union-manufactured goods. Union members enjoy million dollar pensions not because they’re more productive, but because they provide money and votes to politicians who pass stimulus bills.[1]

Wealth is transferred to other special interests and favored constituencies in similar fashion, and with equal effect:  society becomes less productive as more and more resources are allocated by government instead of markets.

Goods and services nobody wants

There’s a reason why so few solar panels and wind turbines were manufactured before government started subsidizing them–they’re economically wasteful. (The same might be said of $100k puppet theaters.) Despite this, the ARRA allocates billions in spending for these and other, equally wasteful initiatives.

Stimulus spending undermines the market process by shifting the focus of production away from goods and services consumers actually demand to stuff Obama, Reid, and Pelosi cherish, like electric cars, or are paid to protect, like union-controlled public education. In a free market, the profit motive serves as a powerful incentive for businesses to produce goods that are more highly valued than the resources used to produce them. Stimulus spending encourages the opposite.

The free market has made production possible on a scale once thought unimaginable. Stimulus programs, on the other hand, promote cronyism over competition, stagnation over progress, and waste over efficiency. The only thing they truly stimulate is our gradual impoverishment.

Notes:

  1. And, more importantly, to politicians who craft pro-union legislation.

Further reading:

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