Naked Emperors

Last week Matt Yglesias at Slate.com posted an article entitled "Print Money.  Mail Everybody a Check."  The hypothesis of the article was that the solution to our economic woes would be for the Federal Reserve to print up a whole bunch of money, and then follow up by sending the money out to everybody in the country.  The policy was pretty much encapsulated by the headline.

Amplifying on the original concept, Yglesias goes on to explain that giving everyone free money will stimulate the economy.  People will use their free money by going out and spending it.  In spending the money, business will see increased demand, and hire more workers.  Those workers, once hired, will get paychecks, and spend them.  The paycheck spending will stimulate more demand, leading to more hiring.  A virtuous circle of spending and hiring will take place until the economy is back at full employment.

This is pretty standard Keynesian thinking.  The only problem is that it would not work.  As long as they were receiving the free money, spending would continue.  Once the free money stop arriving in the mail, the stimulative effects would dampen out quite quickly.

I  know this is true, because we have just finished trying it.  Twice.

The most recent round is just finishing up.  We call it "tax season."

Think about it.  The way the tax and withholding system works in America, most people get a refund.  I know I did.  The lower the income level, the more likely you are to receive a big refund, largely because of the Earned Income Credit and Additional Child Tax Credits.  The majority of households received those refund checks from mid February through the end of March.  You may have noticed that stores and restaurants were a little fuller during that time period.  You may have also noticed that there was no great surge in Help Wanted signs appearing.  Once the free money disappears, the stimulative effects decline rapidly.

Back in December was the previous time we tried stimulus spending.  It was called Christmas spending.  Once the spending stopped, the seasonal hires started to get pink slips.  No long term beneficial results in terms of increased hiring by businesses.

Standard Keynesian economics holds that the problem of modern industrial economies is a lack of demand, and that the government can increase demand by deficit spending.  All of the various pump priming schemes put forth are variants of that basic idea.  Now, maybe in the '30's that idea worked, although evidence is emerging that it didn't work as well as originally thought.  But in the new millennium,  deficit spending has proven to be a colossal failure.  Our economy is structured to absorb big deficit spending without reigniting long term economic activity.

So I'll go out on a limb here, and just say it: Keynes was wrong.  Too bad, so sad, sucks to be us.

To find an alternate policy approach, we need to stop deifying the approach that is not working.  The emperor isn't wearing any clothes.  And frankly, there's shrinkage.