Is Stimulus Impossible

The Heritage Foundation’s Brian Reidl explains in National Review that it’s not possible for stimulus to work:

The idea that government spending creates jobs makes sense only if you never ask where the government got the money. It didn’t fall from the sky. The only way Congress can inject spending into the economy is by first taxing or borrowing it out of the economy. No new demand is created; it’s a zero-sum transfer of existing demand.

So suppose this engineer Henry Ford wants to build a car factory, but he doesn’t have the money it costs to build a car factory, so he borrows the money from a coal dealer named Alexander Malcomson—is that a zero-sum transfer that doesn’t create jobs?

The issue with government stimulus spending, I would say, isn’t that money doesn’t “fall from the sky.” The issue is that we’re not very confident that congressional appropriators can allocate real resources (people, electricity, buildings, steel, etc.) in the most efficient way and prefer to leave this allocative function up to the free market. But how reasonable a concern this is has to be a function of fully-employed the resources are. If unemployment is at 4 percent, then injecting spending into the economy probably is going to mostly involve just shifting things around.

FRED Graph 1

But if unemployment is at 10 percent, office vacancies are sky-high, retail stores are closing their doors, millions who would prefer full-time work are working part time, and capacity utilization is in the dirt then things look different. It’s hard for government planners to outsmart the market in terms of how resources should be employed, but it’s not that hard—having tons of people sitting around doing nothing is not an efficient outcome.

And even within circumstances of depressed output, it’s possible to structure your stimulus in a way that involves as little central planning as possible. You might heavily emphasize measures that basically increase people’s purchasing power and let the market sort out what gets produced—hence the Making Work Pay tax cut, the SNAP increase, the Unemployment Insurance payouts, and the COBRA subsidies. And you can try to simply maintain stability in existing employment—hence the aid to state governments. Then beyond that, you try to take some idle resources and put them to work—hence investments in infrastructure.