The Key to Economic Stimulus Success; Focus on Long-Term Growth, Not Short-Term Jobs
Byline: Mathew Manweller, SPECIAL TO THE WASHINGTON TIMES
As the United States struggles through a recession, political leaders are hoping a stimulus package will save us. There is nothing wrong with the government trying to stabilize or even energize the economy. It is the reason we craft fiscal and monetary policies. The problem with most stimulus packages is that they usually don't work.
Unfortunately for elected officials, the Federal Reserve was created as an insulated and therefore independent agency. The president and Congress can pressure the Fed, but they can't make the Fed do anything. In addition, even if the Fed does take action, elected officials can't take any credit for the subsequent results. Politicians like to show the American people they are doing something and they can't do that in the realm of monetary policy. As a result, fiscal stimulus packages tend to win out over monetary ones.
Most stimulus packages rely on public-works projects. It is common to hear presidents and congresses promising an economic package that will build new roads, bridges and infrastructure. It sounds good, except it doesn't work. For starters, infrastructure projects are temporary. Once the bridge, road, or tunnel is completed, the stimulus is gone. Then what? We are still the same country with the same problems and the same economic environment. The only way to keep the stimulus rolling is to build another bridge, road or tunnel. Eventually, we find ourselves paying people to move piles of dirt back and forth. Such projects spread paper dollars around, but do nothing to improve the standard of living or add to a nation's wealth.
Our prosperity is a function of production, not the number of dollar bills. America is a wealthy nation because we produce a lot of stuff, not because we have a lot of dollars. For example, the nation of Ethiopia could pay all of its citizens millions of Birrs to dig tunnels throughout the country. Afterwards, each citizen would have a lot of paper money, but Ethiopia would still be a very poor country (with lots of tunnels).
Public-works projects also create inflation. When the government builds stuff, they don't build consumer products. They build roads, bridges, tanks and dams. How many of you have purchased any of these things in your life? Public-works projects inject billions of dollars into the economy but do not inject a single consumer good. As a result, we end up with more money in the economy but not more goods to buy. …