To Stimulate the Economy, Add Production, Not Demand


One would hope that Keynesian theory would have been fully discredited by this point.  The theory says that you can stimulate the economy having the government give out a bunch of money and therefore create demand.  The idea includes a “multiplier effect” where each time a dollar is spent it is like a new dollar is created, so for each dollar given out it may have the effect of creating 3 or 4 dollars.  This idea has been around since the 1930’s and looks good on paper, but the data are just not there to back it up.

The nail in the coffin should have been the Stimulus plan of 2009 where almost a trillion dollars were given out, and yet unemployment continued to rise.  There will always be those who will say that the recession would have been worse if the stimulus had not been done, but you would think with a trillion dollars, more would have happened if it was going to.  A lot of the money also went for political favors rather than infrastructure projects as was advertised (I believe less than 10% actually went to infrastructure), so maybe it would have worked better if the money had all gone to projects.  Then again, one of the issue with the government spending a lot of money is that a lot of the money will be wasted on pet projects and to reward politically connected constituents, so expecting anything different might not be reasonable.

The trouble is that your are really just moving money around.  If I take $2 from a person who owns a bakery, give it to someone who is out-of-work, and then have that person go buy a loaf of bread from the baker, no wealth has been created.  A loaf of bread has just been taken from the baker and given to someone else.  In order for wealth to be created, the person buying the bread needs to create the wealth needed to buy the bread by doing some work or finding something valuable.  Granted, if the government borrows the money that he gives to the person to buy the bread, it might have a little stimulus effect since the baker won’t see a loss in his money immediately, but in the back of his mind the baker knows he’ll be the one paying for the loan eventually.  Also, as I’ve said, it is very clear from the experiment done in 2009 with the stimulus bill that it doesn’t work in actuality even if the government borrows the money.

Maybe the answer is not to try to create demand by putting unearned money into people’s pockets.  No wealth is created and the economy does not expand because about half of the population isn’t creating anything.  Maybe the answer is to create supply which will motivate people to earn the money needed to get the items and things they want.  To create supply, you need to get people back to work producing things.

Obviously it would do no good to create things that aren’t useful.  Making a whole bunch of office desks isn’t going to cause someone to start an office when there is no work for that office to do.  What if Apple created a bunch of new iPhones, however, that people wanted because of the new features.  People would be motivated to go out and find new jobs or create new ways to make money if none were available in order to get the new gadget they wanted.  Maybe the movie, Field of Dreams, was right when they said “If you build it, he will come.”

Probably the most desirable things are the necessities of life.  Things like food, clothing, and shelter.  Certainly no one wants someone to go hungry or a family to be thrown out on the streets, but maybe all of the food stamp and charity programs are hurting people more than they are helping.  There are whole generations of able-bodied people who do not know life without food stamps and section 8 housing.  When they die their lives really meant little because they never really did anything despite having all sorts of potential.  As long as they have the ability to get whatever kind of food they want and have reasonably suitable housing, they see no reason to take a job or try to better themselves.

Perhaps if government programs and some charities were more selective of to whom they gave aid, or limited the time period for which they gave aid to able-bodied people, more people would find ways to earn an income.  In doing so, they would be producing more goods and services, which in turn would motivate more people to work harder.  They would also be improving their skills, making themselves more valuable employees,a nd therefore being able to make higher wages.  With more people working and learning skills so that they could move up in industry, the level of the minimum wage would become immaterial.

Best of all, the lives of so many would not be wasted.  More people would have the pride that comes from doing a good days work.  A pride that comes because when you do work, you are helping out other people.

Likewise, maybe keeping unemployment in place for so many years is keeping people from getting back to work, which is also lessening production, making everyone poorer.  Perhaps the current recession is dragging on so long because of a lack of production.

There is data to back up this idea.  In the late 1990’s a requirement was added to welfare that required individuals who were able to work to find a job or at least get training after a period of time.   The economy was booming in the late 1990’s.  Granted, there was a lot of activity going on due to the rapid growth of the internet and the founding of a lot of companies at that time, but you need to wonder if getting more people working didn’t also help drive the economy.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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