More bad thinking: WSJ Op-Ed, "Why Spending Stimulus Plans Fail"

The Wall Street Journal published this Op-Ed piece today. It is mired with myths and erroneous thinking.

Read article here.

By the way, I will have the author on my radio show tomorrow (Wednesday, November 19, 10:20am Eastern Time). Please feel free to listen by going to www.bizradio.com. You can also call in, toll-free, by dialing, (877) 777-7713.

An excerpt:

"Congressional Democrats are now demanding another economic stimulus package to "inject" as much as $300 billion into the economy. The package will fail -- just like last year's $333 billion in emergency spending and $150 billion in tax rebates failed. There's a simple reason why.

Government stimulus bills are based on the idea that feeding new money into the economy will increase demand, and thus production. But where does government get this money? Congress doesn't have its own stash. Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It's merely redistributed from one group of people to another."

My comments:

The stimulus and spending didn't fail. Last year's $330 billion added 2.4% to GDP and this year's $150 billion in rebates added, at a minimum, 1.7% to GDP.

Government doesn't tax and borrow first and then turn around and spend after the fact. On the contrary, the government spends first (by crediting bank accounts), then collects taxes and sells securities after the spending has already occurred.

Simple deductive reasoning can prove this.

If government first needed to collect money via taxes and through the sale of securites before it could spend, a deficit could never exist. It would be operating under a system of pay-go.

However, deficits do exist. We know that for a fact. And they exist precisely because the government spends more than it recovers in taxes and the sale of securities.

How, then, could that be possible under your scenario, where the government first had to collect "one dollar for every dollar it injected into the economy?" Under that mode of operating there would never be any deficits.

Consider this: In the past two months reserves in the banking system have increased by nearly $600 billion. How did this happen? Under your paradigm the government would have had to collect that money somehow--either through a levy of taxes or the sale of new securities in the amount needed.

However, in looking at the recent, $700 billion bailout, or the rebate checks that were sent out earlier in the year, no new tax levies had been imposed, nor was the total dollar amount of securities sold by Treasury in the period prior to the spending, anywhere near $600 billion (or $150 billion in the case of the rebate checks).

So where did the money come from?

Again, these are credits to the banking system. If you'd like to see an accounting of this simply go to the first line item on the Fed's weekly Statement. It reads: "Reserve Bank Credit.

Furthermore, it is important to understand that if the Fed did indeed collect taxes first, and/or sold bonds, notes and bills to "get this money out of the economy," bank reserves would have decreased by an equivalent amount because the money would actually have been "taken out of the economy" just as you stated. Yet that didn't happen. In fact, as far as I can tell, not a single American taxpayer reported sudden and unanticipated withdrawals from their checking accounts (earmarked to the "U.S. Treasury") prior to that spending.

Last year the government collected $2.5 trillion in total receipts (taxes plus proceeds from the sale of securities), yet it spent $3 trillion. Now, I'm no math genius but just looking at those two figures tells me that somehow the government managed to pump $500 billion more into the economy than it took in. That's the deficit. And that's why the non-governmental sector (you, me, the private sector), is $500 billion richer, not poorer.