le goods."
Even the massive spending during World War II, long touted for pulling America out of the Depression, didn't necessarily help. In a 2006 paper for the National Bureau of Economic Research, economists Joseph Cullen and Price V. Fisher asked whether the local economies that were the biggest beneficiaries of federal spending on military mobilization during World War II experienced more rapid growth in consumer economic activity than others. Their finding: Military spending had virtually no effect on consumption.
Another economist, Robert Higgs, offered an even more thoroughgoing critique in an excellent 1992 Journal of Economic History paper. After challenging the conventional portrayal of economic performance during the 1940s, Higgs concluded that "the war itself did not get the economy out of the Depression. The economy produced neither a 'carnival of consumption' nor an investment boom, however successfully it overwhelmed the nation's enemies with bombs, shells, and bullets." Breaking windows in France and Germany didn't bring prosperity in America.
In his 2008 book Macroeconomics: A Modern Approach, Harvard economist Robert Barro shows that $1 of government spending in wartime produces less than $1 in GDP—80 cents, to be exact. Stanford economist Bob Hall and Sand Hill Econometrics chief Susan Woodward, neither particularly pro-market, argued recently that each dollar of government spending during World War II and the Korean War produced about $1 of GDP. In other words, the economy is not stimulated by war spending.
Most taxpayers are familiar with the two most recent failed stimulus experiments. The Bush administration passed the Tax Relief Act of 2001 and the Economic Stimulus Act of 2008, two similar tax rebate packages with similar effects on the economy. Which is to say, not much. In 2008, the major component was sending $100 billion in cash to Americans so they would have more to spend and thus jump-start the economy. It failed. People spent little, if anything, of the temporary rebate, and consumption did not recover.
The theory of economic stimuli suffers from several serious problems. First, it assumes people are stupid. Tax rebates, for example, presume that if people get money to increase their consumption, businesses will expand their production and hire more workers. Not true. Even if producers notice an upward blip in sales after the rebate checks go out, they will know it's only temporary. Companies won't hire more employees or build new factories in response to a temporary increase in sales. Those who do will go out of business.
Second, the thinking behind stimulus legislation assumes that the government is better at spending $800 billion than the private sector. When President Obama says, "We'll invest in what works," he means, "unlike you bozos." The president's faith in Washington is charming, but politics rather than sound economics guide government spending. Politicians rely on lobbyists from unions, corporations, pressure groups, and state and local governments when they decide how to spend other people's money. By contrast, entrepreneurs' decisions to spend their own cash are guided by monetary profit and loss. That's likely to work better and certain to produce more innovation.
But the biggest problem is that the government can't inject money into the economy without first taking money out of the economy. Where does the government get that money? It can either borrow it or collect it from taxes. There is no aggregate increase in demand. Government borrowing and spending doesn't boost national income or standard of living; it merely redistributes it. The pie is sliced differently, but it's not any bigger.
Stimulus packages—and present or future tax increases that fund government spending—end up burdening the economy. Such was the case in the 1930s, during World War II, and in 1990s Japan. Thankfully, the 2001 and 2008 tax rebates, while ineffective as stimuli, didn't make things worse.
If politicians actually want to do something cost-effective to solve our economic woes, here's some ad