Second stimulus? That was inevitable…
Obama advisor Laura Tyson is now calling for a second federal stimulus bill because the $787 billion bill that Obama signed upon taking office was “a bit too small.” Really?
For those who call on government to “stimulate” the economy with greater spending in order to pull it out of recession, the call for consecutive stimulus bills will always be inevitable. This is because such a belief in the power of government spending relies on entirely faulty economic reasoning.
First, advocates for government stimulus misunderstand the cause of recession. Recessions are the natural healing process that occurs in order to move economic resources back into their most productive uses. During periods of aggressive monetary expansion by the central bank (such as has occurred over the last 15 years), manipulated interest rates send faulty signals to investors about the amount of savings available within society. As a result, scarce resources often become over-invested in some sectors of the economy because market actors are led to believe that more savings are available than is actually the case. When market actors realize their mistake there is an immediate panic and then an ensuing recession. (For a more in depth explanation of this phenomenon, read about the Austrian Business Cycle here.)
Those who advocate for government “stimulus” misunderstand that recessions are a necessary healing process for the havoc wreaked by Federal Reserve policy. In a recession, unwise investments can be undone by allowing businesses which were subject to this over-investment to fail. The subsequent liquidation of the productive resources that had been locked up in these less efficient or less productive businesses frees those scarce productive resources for use by other, more productive firms.
The entire point of a government “stimulus” is to prevent that necessary correction from occurring. Hence, a successful stimulus program would keep productive resources locked up in less productive firms by not allowing those firms to fail. The predictable result is that recession drags on indefinitely as productivity remains stagnant. This is what happened in the 1930s.
For those who place their faith in the power of government spending and not market fundamentals, the inevitable failure of a government “stimulus” will only lead to calls for more stimulus. Of course, none of the stimuli will ever lead to recovery since they are, themselves, the reason that recession drags on. Yet, the subsequent failure of one after another leads those who are not grounded in sound economic fundamentals to claim that each subsequent “stimulus” package must be bigger and bigger in order to pull the nation out of recession.
Unfortunately, this is all terribly predictable and ominous for the prospects of true recovery.