This is somewhat in response to this editorial from Brian Riedl at the National Review. Over the next few weeks, I am sure there will be a lot of critique of the stimulus plan and what good it will actually do for the economy. As the first write up of its kind, I found a few things in Mr. Reidl’s editorial particularly strange. If you want to read about deficit spending, check out the rest of the story. If you don’t feel like falling asleep in front of your computer again, you may want to watch last night’s episode of The Office. Continue at your own risk.

Mr. Riedl starts out by mentioning how all of this new debt racked up for the stimulus will be dumped “into the laps of our children and grandchildren.” In a sense he is right, but future generations will not actually ever pay the debt back. At some point between now and the time of your grandchildren, the federal government will default on its debt obligations either through inability to repay, or through hyperinflation of the dollar. The old song and dance about our children and grandchildren is stupid. No one, and I mean no one, in Washington has a plan to pay off the federal debt. The true cost of the debt expansion will be immediate in the form of ever-growing interest payments on the debt. Last year, the federal government paid rich people around $240 billion to hold the nations debt. That means that last year the government printed $240 billion, and then gave it away. They received nothing in return. And $240 billion is a low number because interest rates are at historic lows and I am not including the interest payments on government held debt – if included the amount paid in interest payments jumps to $450 billion.

Here are his 10 questions, followed by my responses.

President-elect Obama claims that spending approximately $800 billion will create 3.675 million new jobs. That comes to $217,000 per job. This doesn’t sound like a very good value, especially with the national average salary around $40,000. Wouldn’t it be cheaper to just mail each of these workers a $40,000 check?

Since specifics of the proposal are not yet available, Mr. Riedl is being a little sarcastic. But I will play along. If all of the money was actually printed and sent out, it would be better, in my opinion, to direct the money toward something that could actually help our economy transition to a more sustainable economic future. Government can do that, they can pick which projects to fund. In reality, government is not going to put much of this money in anything that will help us in the future. A lot of this money is going to be dumped on expansion of our 20th century transportation infrastructure, which is stupid.

Politicians say deficit spending will expand the economy (as if President Bush’s $300 billion budget deficits brought economic nirvana). If that were true, then the current $1.2 trillion deficit — the largest in history — would already be rescuing the economy. It’s obviously not. So why would $800 billion more of the same suddenly end the recession?

I would argue that the only reason the economy grew during the Bush years was due to government policy. If you take away all of the deficit spending (around $4 trillion) and the cheap money policies of the Federal Reserve, the weakness of our economy would be much worse than it is now. All of those deficits (along with the personal deficits individuals are running) are the engine of our economy right now.

We’re told that government spending will add new spending power to the economy. But Congress doesn’t have a vault of money waiting to be distributed: Every dollar lawmakers “inject” into the economy must first be taxed or borrowed out of the economy. If government borrows the money from American investors, investment spending drops accordingly. If it’s borrowed from foreigners, net exports drop accordingly. How does borrowing $800 billion from one group of people and giving that $800 billion to another group of people make us wealthier?

I kind of agree with Mr. Riedl here, but with a few minor exceptions. First, all of this extra spending isn’t ever going to be paid with taxes. There is no intention of that, as I mentioned earlier. The problem in the private sector right now is that government policies have thrown things off so much, no one is really making any moves that are truly free market. Equities are in terrible shape right now because businesses are scared to loan to each other due to the glut of junk assets being held in companies right now. The only big actor in the market today is the federal government. Investors get this and that is why they are dumping their money into treasuries, sometimes without any payback. Basically, these actions are intended to increase the velocity of money, which is good in the free market. I don’t think it will work (see the hyperinflation remark earlier), but a government with an eye on maintaining the status quo doesn’t make bold moves. It just papers over the problem.

Some answer the previous question by saying that transferring income from savers to spenders keeps more money circulating through the economy. That made some sense in the 1930s when people hid their savings in mattresses because they didn’t trust the banks. But today, people use their savings to pay down debt, invest, or put it in banks — in each case, making the purchasing power available to others wishing to borrow. Thus, savings circulate through the investment spending side of the economy. How does transferring money out of investment help?

Mr. Riedl is either intentionally ignoring the fact that the credit markets are stalled, or he just doesn’t realize it. Either way, as I mentioned before the free market is not working right now and the establishment’s prevailing logic is that government needs to pump up the economy. I think what the government needs to do is force financial institutions to liquidate their bad assets all at once, write down their losses or close up shop so that the free market can work again. No one with any power will actually support this position because it could crash the economy.

Policymakers are basing the “stimulus” bill on economic models that wrongly assume every $1 of government spending increases the economy by approximately $1.60. Is it really that simple? By that logic, debt-ridden, big-government countries like Italy, France, and Germany should be wealthier than America. And why stop at $800 billion? Such logic suggests unlimited prosperity could be guaranteed by the government borrowing and spending $800 trillion. Should America be basing such costly decisions on these types of economic models?

An even better question is should America continue to base economic models on forecast growth when the US economy has been stagnant overall once you remove the bubbles.

Lawmakers tell us every $1 billion in highway “stimulus” can be spent creating 34,779 new construction jobs. But Congress must first borrow that $1 billion out of the private economy. Won’t the private sector then lose the same number of jobs?

Mr. Riedl, do you consume the news? The economy is in a deflationary spiral and those who have cash are hoarding it, they are not investing in job creation right now. You could make the argument that the government needs to let the crash work itself out and let the free market correct itself, but no one is going to vote for the guy that says that.

During the 1930s, New Deal lawmakers doubled federal spending — and unemployment remained above 20 percent until World War II. More recently, Japan responded to a 1990 recession by passing 10 “stimulus” bills over 8 years (building the largest national debt in the industrialized world) — and their economy remained stagnant. Why do lawmakers believe the same failed approach will succeed for the U.S. today?

I agree. I say let it fail. But no politician has the balls to allow that to happen.

The economy sank because people over-borrowed for houses they couldn’t afford, and financial institutions over-borrowed for investments they badly misjudged. Washington’s solution is to borrow $800 billion that it cannot afford. How will adding $800 billion to the national debt (which will also raise interest rates) solve a recession created by imprudent borrowing? And who will bail out the American taxpayer when the bill comes due?

The economy sank – I would say it corrected a little bit – because people stopped believing the hype about their various investments. It was all fake, none of the bubble was real. Like all economic activities, it was a figment of our collective imagination. The economy started to correct because how bad it had always been finally dawned on people. It won’t solve anything, but it will probably pump things up a little bit. Again, no one in Washington intends to pay any bills when they come due.

Temporary tax rebates were implemented in 1975, 2001, and 2008, and most economists agree they failed to help the economy. Long-term marginal tax rate reductions implemented in 1982 and 2003 both substantially increased economic growth. So why are lawmakers planning another round of temporary tax rebates, followed by an increase in tax rates?

In 1982, part of the tax cuts was the increase in payroll taxes which gutted the working class and was diverted to the general budget through accounting gimmicks called Government Account Series bonds. You could just as easily explain the rebound after 82 on lower commodity prices, lower real wages for the working class (which equated to higher profits) or the beginning of the savings and loan bubble. In 2003, the tax cuts were accompanied by huge deficit spending and low interest rates which encouraged the inflation of the housing bubble.

Mayors have pledged to spend stimulus funds on items such as a mob museum in Nevada, a polar bear exhibit in Rhode Island, and curbing prostitution in Dayton, Ohio. As National Review asked, how come one Bridge to Nowhere is a national embarrassment and 1,000 Bridges to Nowhere are a “stimulus?” Given the 11,000 annual earmarks, why should taxpayers trust politicians to spend this money better than they would spend it themselves?

The stimulus won’t make a difference in the long run because of what they are going to blow it on (1000 bridges to nowhere seems like a good piece of hyperbole). $800 billion of forced spending to develop new infrastructure for this country could go a long way. Improvement of the communication and electronic grid would be a good start. American manufactured wind and solar would be another good bet for the long term as well.

Mr. Riedl is stuck in the 20th century conservative mindset that if money gets freed up, everything will be fine. The problem is that there is all sorts of money that is free to move but rich people are not doing anything with it out of fear that the worst is yet to come, and they are probably right.

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