I have just seen the most disturbing advertisement. Over a series of mundane images of bland couples opening mail and buying various items, the narrator explains that many people will be receiving checks as part of the Economic Stimulus Act of 2008, and that my local chamber of commerce thinks the best thing to do with those check is to spend them on local businesses.

Perhaps I am overly sensitive, but being told, in effect, that it is my patriotic duty to spend troubles me.¹

The entire premise of this "economic stimulus" is disturbing. It reeks of all those failed economic theories which emphasized consumption over savings. I had thought the neo-Keynesian theories emphasizing the speed with which money changes hands had been debunked, but apparently they are alive and well.

So I suppose I must, once again, debunk this whole stimulus idea.

First, the money that the state is giving comes form one of two places. Either the state took it through taxation, or it created it through monetary inflation. In the first case, had the state not confiscated the money, the original owners would either be saving, investing, or spending that money themselves. In the second, it serves to create price inflation and devalue the currency already in circulation. I will deal with both in detail a little later, my purpose here is simply to say that the purchasing power the state is "giving" was already in the hands of the consumers, the state either took it explicitly through taxation or implicitly by currency devaluation.

Second, the concept that consumption stimulates the economy, while investment (including savings²) does not is just absurd. The periods of greatest economic growth have almost always followed the periods of greatest savings and investment. Investment is the reason wages are so much higher in developed nations, investment is why our lifespans continue to rise so dramatically, and investment is why we have such superior education (despite the NEA). Consumption serves to make the government's statistics to look better, and may produce more dramatic effects, but in the long term investment does much more to benefit the economy than spending does.

And that brings us back tot he source of the money.

If the money was taken through taxation, it largely came form the wealthy, mostly from money that would otherwise be invested. If it was created through inflation, that too disproportionately hits the wealthy³, as when money is devalued, those who have the most invested or held in cash tend to be hit hardest. As those with less wealth tend to have most of their worth tied up in homes, and maybe businesses, which are not as hard hit by inflation, the wealthy, with much invested in stocks or bonds, tend to be hit harder.

Whatever the method, this removal of money from investment to place it in the hands of those who will spend it on consumption does not help the economy. It may drive up government numbers, but in the long run, it makes us all poorer.

So, the question is, why do it?

The answer is simple. The press, the opposition, and the government itself, is obsessed with the technical definition of "recession". The moment indicators show a "recession" it will be news, Bush will be subjected to ridicule, and the Democrats will crow about the failure of the market. As that definition depends on arbitrary government figures, these steps are being taken to make sure those figures do not meet the definition of "recession", regardless of whether they do any good or not⁴.

So we end up with advertisements reminding us of our patriotic duty to spend, while the state seizes savings to encourage spending, all supposedly to improve the economy.

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1. To forestall an obvious comment form Bush haters, when the president told America to go shopping following 9/11, that was more a call to return to normalcy rather than the "patriotic duty to spend" that this ad implies. I still thought Bush's speech was ahrdly the best choice, but it was not as disturbing as the advertisement here.

2. Savings is always the same as investment (with one exception), unless you bury your money in the backyard or hide it in your matress. As long as your savings are held by a financial institution, they are lent out. Now, there is one excpetion, in this age of consumer credit, and that is the small percentage of loans granted for consumption. So, savings is no longer exactly equal to investment, the way it was when most classical theories were developed. It is now equal to investment plus consumer credit spending, but the point is that savings is not money removed from the economy, it is still active, just not active on behalf of the person doing the saving. (Even Keynes admitted this early in his theory, though his later assumptions contradicted his earlier statement. For details see Hazlitt's Failure of the New Economics.)

3. I am ignoring here the additional ill effects of inflation. They are well documented elsewhere, and perhaps I will write about it later, but for the moment it is enough to show how inflating for purposes of consumption diverts spending power form savings to spending.

4. The government is also doing this because they are always expected to "do something" when conditions are bad. Rather than tell the public that the government cannot help, their need for reelection tends to force politicians to "do soemthing" regardless of how useless, or even harmful. But that is the subject of another essay.