The stimulus bill is taking a justifiable beating in the polls. It has become a pork-laden parody of leftwing social engineering. The economic theory it relies on is, of course, nonsense. The Wall Street Journal summed up the fallacy perfectly:
The person who is taxed…[to pay for each dollar of the stimulus] will have $1 less to spend. If the beneficiary of that $1 spends it on something less productive than the taxed American…would have, then the net impact on growth will be negative.
Additionally, consider another piece of the logic. Say for the sake of argument that Obama’s dubious claim that 4 million jobs will be created is true. Let’s further say that Congress manages to spend all the money in the next two years, which also isn’t likely. So we now have the best case scenario of the stimulus bill’s supporters.
Somewhere over the next couple years you have 4 million jobs that are either in government itself or directly dependent on government contracts with some additional jobs that are indirectly dependent on the government contracts. These jobs are politically driven, meaning they were created with political benefits in mind. They are going to be diffused across geography and industries based at the whim of the political machinery.
Now you have 4 million people spending money that they (maybe) wouldn’t have been spending. That sounds like it’s good for the economy but if you factor in the question of whether the money is being spent more or less productively the picture is less clear. Plus when the government contracts run out these jobs may or may not remain because they were created to fill a government contract not to grow a company. When those jobs start to go away we’re in part or in whole right back where we started. Why? Because much of the money was spent on less productive uses than it would have been spent otherwise.
Let’s contrast this a different approach to stimulus: broad-based tax cuts. Whether in the form of rate cut or a tax holiday, you suddenly have nearly 90 million tax payers in literally every nook and cranny of the country spending money now they definitely would not have otherwise. Let’s see. Which is better, 90 million people spending money generated in the private sector or 4 million people spending money that will run out and was sucked out of the private sector anyway? Hmmm…tough choice.