Too Much Stimulus

I'm not an economist, but neither am I a neophyte. I've had an amateur fascination with economics that began in college and was rekindled when I read the Wealth of Nations fives years ago. I regularly challenge myself with various books and articles.

So I want to put in my two cents on the Stimulus Debate. I'm against any further massive stimulus packages. I will grant that a stimulus package can have some good effects. But I believe the short term gain is not worth the long term side effects.

BTW: If you end up agreeing with me please sign this petition: http://nostimulus.com/

Setting aside a moment whether the the stimulus would even work, I look at this way. We need to take our medicine. Recessions, even big ones, are good. Let's let the medicine do what nature intended: cause us to reset our living and saving habits to a more sustainable level.

Now back to the stimulus. Will it work? The Keynesian philosophy is that for every dollar of government money spent, there is a multiplier effect. One study suggested the multiplier is around 1.4. So we spend a trillion and GDP grows by 0.4 trillion. Sure, if your goal is to get the economy going, that is great. Adding 0.4 trillion to a 13 trillion economy can help. (A multiplier less than 1.0 would mean that the stimulus was harming the economy by crowding private investment and channeling economic activity into less productive venues.) So yes, stimulus packages can work.

But can there be any drawbacks to an additional massive stimulus program? I can think of some

1. All of the lowing hanging socialist fruit has already been picked! We already have a major stimulus package in effect. Unlike the Great Depression, we already have major social programs in place that guarantee payments to those who are hardest hit. We have employment insurance. President Bush has already signed into law an increase of unemployment benefits up to 39 weeks. That's a major stimulus package. We also have medicare recipients whose benefits guarantee a steady flow of stimulus to the health care industry. Need I mention social security? Just remind yourself how much the government already force feeds the economy here: www.usgovernmentspending.com.
   
2. How about the long term? The chickens have to come home to roost. Higher taxation or inflation must pay for the stimulus. Granted, the multiplier effect I talked of will generate more tax revenues (just as the Bush Tax cuts did) So that helps. But assuming tax revenue of 10% of GDP, you'd need a multiplier of 10 to have the stimulus pay for itself. (stimulus * 10 * 0.1 = stimulus) With a more realistic multiplier of 1.4, you don't get a free lunch. (But I will grant that multipliers can be much higher if spent on the right things)
   
3. Lag time. My gut instinct is that if we manage to keep the financial sector stable, this recession will work itself out within a year. Some economists have estimated that the lag time for stimulus packages can be such that the positive effects come after the recession is already over. Then, just as the private sector is getting going again, it is suddenly competing with government expenditures, and you get much more price pressure (inflation) and the allocation of resources is more heavily weighted to government projects which are less efficient than private ventures.
4. Even assuming that the stimulus works great and it comes in time to make a difference, what confidence do you have that the government can ever wean itself of the greater power and control over the economy? I have worked in government. I know exactly how governments operate versus the private sector. We don't need a long term society that is weighed even more heavily toward government control. The New Deal already set the bar so high that we have an impending baby boomer crisis. Let's not plant more seeds to destroy our once great country.

One more point that needs to be brought up. President Bush did not lead as a fiscal conservative. This stimulus package debate should be answered by simply looking at how well Bush's policies turned out! Government expenditures grew under President Bush by trillions of dollars. I'd have to check, but I think Bush outranks every president since Roosevelt in terms of adjusted dollars (probably not in terms of GDP) The Iraq war, Homeland Security, Prescription drugs, No child Left Behind, billions in bailouts last year. This was all government stimulus. Look where it got us? Yes there were almost 7 years of interrupted economic growth, but the chickens came home to roost.

Here are a few articles written by economists on the stimulus debate:
Against
Mankiw
For
Krugman
Middle of the Road
Cowen and also this

Other Links
Pro And anti-Stimulus arguments back in Jan 2008 (Remember the stimulus checks last year?)
Refutation of the Keynesian Multiplier
Is More Government The Answer?