Stimulus is Stimulus

Let's see... there's Conservation of Energy, Conservation of Momentum, there's even Conservation of Information in the form of quantum states, so how about the Conservation of Money. When you attempt to stimulate the economy by injecting $1 you get... something. But what?

I believe I first wrote on this curious topic back in the fall in the wake of the federal election. At the time there was lots of talk about $300M wasted on the election. As I argued then, it was not wasted. While it could be validly argued that the money was misallocated, it was not wasted. The government took $300M from us, the country's generators of wealth, and plowed it right back into the economy. It was $300M out and $300M in: netting zero change, or thereabouts.

It was a timely topic as the economy went into a nose dive almost immediately afterward. That started the global debate over government stimulus spending. In turn, major corporations everywhere lined up to claim their share of the stimulus money. Some of this behaviour is disgusting while others are merely comical. Yet if there is to be government spending it does have to go somewhere.

In this light I quite enjoyed this article in the Washington Post by Steven Pearlstein. In a concise article he clearly ridicules the attitude, and understanding, of some of the politicians in Washington. The US situation is certainly important to Canada, but the points he makes are equally applicable to our own politicians.

His view, as it is with what I believe are the most sensible of the analysts and participants, is that stimulus is stimulus: if the government spends, no matter where, even on ethically questionable projects, it still stimulates the economy. If you spend it in the wrong place it still ends up in the right place, eventually, since the first people in the handout line spend it elsewhere in the economy. Money circulates, it does not disappear.

It's really the joint issues of appearance and effectiveness. No politician wants to be seen to be spending money foolishly, no matter whether it is appropriate to the ultimate objective. More importantly, if the money is placed wisely it may be possible to accelerate reinvigouration of confidence and economic activity. For example, is it ethically appropriate or effective to give money to automobile manufacturers in light of their many years of mismanagement? Giving them money does not generate economic activity. It only keeps their creditors at bay for a while longer. The hope is to tide them over until the economy recovers (fingers crossed) and people start buying cars again. It would then have to be their cars that people buy, not the cars of the more successful manufacturers. Is that likely?

The dreadful thing about this way of spending money is that it does not generate economic activity. If there's no car buying going on, they will still close plants and continue to send workers home. Wouldn't it be better to place the money in the hands of those who would buy cars if they could? That would generate economic activity. Of course they (we) may not buy the cars of the failing companies - after all, that's why they're failing - but they will buy cars, and that's what we want.

I don't know if all this massive public spending, and debt, is the right solution - I'm not that smart - but if we're going to do it we should do it the best way possible. By best, I mean put the money in the hands of those who will put the money to work by generating demand for goods and services. If we don't do that we may as well sit on our hands and wait for the US to get their own house in order and start buying our stuff again. That is a strategy that doesn't appeal to me at all, but it seems to be uppermost in the minds of many of our politicians.

We need to invest in a way that will generate activity in sectors not reliant of the US' renewed appetite for our commodities. Perhaps that includes technology, though perhaps I'm talking out of self-interest. However I feel strongly that is better than putting the money into GM since it gives us the chance to create something new with global appeal. I admit this is a gamble, but I'd rather that than betting on a sure loser.