Larry Summers' Stimulus Plan Won't Stimulate

Think for a moment about what might be the economic impact of going to your neighbor’s house and stealing $500. Assuming you were to spend every dollar on all manner of consumer goods, would you be generating economic growth?

Conventional Keynesian logic suggests you would by adding an extra $500 of demand to the U.S. economy. Where this thinking breaks down is when we consider your neighbor’s reduced economic circumstances. Suddenly he or she would be $500 poorer, and whether your neighbor had planned to spend or save the money (savings are lent out so ultimately accrue to consumption too), any new consumption from your end would be met with a commensurate reduction in consumption on the part of your neighbor.

Some would point to a hidden economic benefit relating to the theft, in that the neighbor, $500 poorer, might purchase enhanced home security to avoid future break-ins. The latter may be true, but spending there would merely detract from consumption elsewhere, not to mention that as opposed to generating any real economic activity, funds spent on home security would simply protect your neighbor rather than generate productive economic activity in the way that a $500 mutual-fund investment might.

The above scenario should be considered in light of the various calls for “economic stimulus” engendered by last Friday’s weak employment report. While the economists advocating stimulus dress up their plans in fancy rhetoric, stripped bare, their ideas greatly resemble the theft referenced above.

Former Clinton Treasury Secretary Lawrence Summers is the most prominent advocate of robust aid from Washington. In a Financial Times op-ed on Monday, Summers suggested “a $50bn-$75bn package implemented over two to three quarters would provide about 1 per cent of gross domestic product in stimulus over the period of its implementation.”

Notably, Summers was not advocating marginal income tax rate cuts across the board, but instead would like the federal government to issue rebate checks that would be put in the hands of Americans most in need. His view is that needy Americans would spend the rebates, thus “insuring against excessive declines in consumer spending that lead to reduced employment and further declines in incomes and spending.”

The errors in his thinking quickly become clear when we consider who among Americans actually pays taxes. According to the website ThanktheTaxpayer.org, the top 50 percent of American earners account for nearly 97 percent of all federal revenues.

If Summers’ plan is followed, rather than rob their more well-to-do neighbors, the bottom 50 percent of earners – the very people Summers would like to see showered with money – will simply let the federal government do their thieving for them. And rather than increasing demand in the economy by $50 to $75 billion, Summers’ economic-stimulus gimmick will merely shift spending from one set of hands to another. There will be no net increase in spending.

Worse for the economy, referenced above is the idea that the thieved might spend more money on non-productive home security to protect their wealth. Looked at in light of wealth redistribution by the federal government, the same concept will reveal itself; only in this case high-earning Americans will consume more capital on lawyers and accountants who, rather than generating positive economic growth, will only protect their clients from future governmental attempts to take their hard earned dollars.

Returning to the Americans Summers deems most in need of help, the single best way to alleviate financial uncertainty among the less fortunate is to let the successful among us keep what they earn. If they don’t spend all of their earnings, their excess capital, far from lying dormant, will be lent out to entrepreneurs and invested in the various companies that employ workers across the earnings strata.

Sadly, amidst all the hysteria generated by last week’s employment report, there’s very little talk of the federal government doing the one thing that would actually help less prosperous Americans. The latter are 100% reliant on excess capital that if not captured by the government, flows into companies in the form of higher wages for those in need.

In short, with economic growth apparently flagging, cheap attempts at class warfare mean that those most in need of economic help won’t get it. But if fixing the U.S. economy is indeed contingent on getting money into the hands of those who don't have it, true “stimulus” would necessarily involve taxing less those who do.