What is economic stimulus?

I heard President Obama say the other day that "stimulus is spending money." The president is referring to government spending and is advocating his economic stimulus bill. Still, it begs the question, what kind of spending can stimulate the economy?

Most of the spending that government does has no meaningful lasting impact on the economy. Consider the stimulus bill passed in the Spring of 2008. Remember getting your $400 check in the mail? The impact of that was a temporary spike in the economy during the second quarter of the year. Since then we have lost millions of jobs and the economy has shrunk.

Why doesn't this work? Consider that a government wants to tax away money from 15 people and spend that money on hiring a new teacher. The politicians can say that their new spending of $30,000 has created a new job and put $30,000 into the economy. However, they ignore the fact that they took the money from other people who can no longer spend it themselves. The $30,000 is not new money in the economy; it is just money that is being spent by the teacher instead of the 15 original owners. Those 15 people were each going to hire a painter to paint their houses. That painter will no longer have work to do and will be out of a job. What has happened? The government has just transferred wealth from some people to others and created work at the expense of others' work. No net employment or economic growth occurs. It just shifts who is spending and working. Spending someone else's money does not provide stimulus.

This story works pretty well for state governments who have to balance their budgets. However, the US government will be borrowing money to pay for any stimulus plan. You may ask how that changes the story.

Those investors who are looking for bond investments will be buying all the Treasury securities that will have to be issued to fund the plan. But what would those investors buy if the government was not selling so many bonds? They would have to buy something else, like corporate bonds.

Corporations issue bonds to invest and expand their businesses. With this capital, a company can build a factory. The building of that factory creates many construction jobs. Filling the factory with the machinery needed to produce the product expands those jobs to the companies that build the equipment. So this spending creates jobs now. In addition, infrastructure is created (the factory) that provides for the ongoing work of the factory jobs. This spending creates jobs now and the associated expanded business operations maintain jobs into the future.

This is in contrast to most government spending, which creates temporary jobs now, but has no follow through into the future...unless of course, the government borrows more money in a follow-up spending plan. So in the case of borrowing the money, the government is sucking up all the capital and spending it. Private enterprise no longer has access to it and therefore can't spend it. Again, the government has just changed who is spending the money in the economy and what it is being spent on.

This leads to the last question: Is the government better able to determine who should be spending money and what it should be spent on then those who have the money?

I would argue the answer is "no". If the government could do this effectively, then the Soviet Union would not have economically collapsed and the Chinese government wouldn't be promoting capitalism for the past two decades.

In the end, I must conclude that "stimulus" is not just "spending."