We’ve had several years of un-stimulating talk about stimulus spending, what it is, what it should be, what we should spend it on, why we’re spending it, etc. At some level, all of the details are nauseatingly banal, because it largely boils down to a question of whether or not we think it’s the government’s role to print and borrow money in order to create economic activity – or even if those efforts actually create increased economic activity. To put it bluntly, if federal spending stimulated the economy to the levels the proponents of stimulus say it will, why do we ever – ever – have recessions? Isn’t all government spending stimulative? So if stimulus works, why isn’t the economy always roaring along at full speed, creating consistent GDP growth rates in the mid-to-high single digits?
The reality is that monetary and fiscal policy have effects in the aggregate, but often not in the way the politicians who are trying to sell you something would have them be. For today’s example, let’s look at how much the Fed has increased the money supply (shudder):
In 2010, it was 800 billion. Now in 2013, it’s 2.7 trillion. That’s an increase, in under 3 years, of 238%. All of this was done under the assumption that an increased supply of money would create the conditions for companies to more easily invest in new projects, capital assets, and people, etc., and thereby stimulate economic growth. Because the Fed has also basically set interest rates to near zero, the only other button it can push is the money supply – and it hasn’t stopped pushing it for 3 years.
If we were to see more investment, more spending, essentially, of all that increased money supply, the velocity of money (the rate at which a dollar is spent in the economy – the higher the velocity, the more vibrant and active the economy) would be increasing, and we’d likely be seeing significant GDP gains based on real economic growth. Instead, the velocity of money has decreased in direction proportion as the supply of money has increased. In other words, the more money that became available, cheaply, the less likely people were to spend it. It’s like the dollar caught a cold and everyone left it to suffer alone in its cubicle, with no friends, for 3 years.
What does all this mean? It means that the mechanisms by which both monetary (the Fed) and fiscal policy (the USG) impact the economy are very large, very dull, and have outsized impacts that were never part of the initial motivations. Applying economic pressure by inflating the money supply does not guarantee that companies will magically start investing and spending. In fact, when the USG, in parallel with the fiscal and monetary efforts, creates acres of new regulations, decides to commandeer 1/6th of the economy via Obamacare, and gives bureaucratic institutions the ability to essentially issue edicts with the force of law with no representation by elected officials debating the merits of such edicts openly, in Congress, well, let’s just say there have been more disincentives put in place to spend than there are available dollars on the planet to spend.