Government Stimulus Is the Best Way to Get Out of a Recession

I. Capital AccumulationAt its heart, a recession results from a loss in total capital. Since capital is the accumulated wealth that is owned by business enterprises or individuals and that is used for the purpose of earning profit or interest, a decrease in capital means a decrease in economic activity, which is the very definition of a recession. Accumulating capital itself is known as saving, which is essentially spending not used for personal consumption. Saving is essential for the production of consumer goods, and with it, everything that goes on before retailing a product. With that, ". .. economic recovery requires that the economic system rebuild its stock of capital and that to be able to do so, it needs to engage in greater saving relative to consumption. This is what will help to restore the supply of credit and thus help put an end to financial failures based on a lack of credit. Recovery also requires the freedom of wage rates and prices to fall, so that the presently reduced supply of capital and credit becomes capable of supporting a larger volume of employment and production. Recovery will be achieved by the combination of more saving, capital, and credit along with lower wage rates, costs, and prices. In addition, recovery requires the rapid liquidation of unsound investments. "[1]What government stimulus does is further reduce the amount of capital in the economy when the cause of the problem is too little capital to begin with, the result being that the recession is worsened. "The reason that stimulus packages cause a further loss of capital is that their starting point is the consumption of previously produced wealth. That wealth is part of the capital of the business firms that own it. The stimulus programs offer money in exchange for this wealth and capital. But the money they offer does not come from the production of any comparable wealth by the government or those to whom it gives money — wealth which has had to be produced and sold and thus put into the economic system prior to the withdrawal that now takes place. The starting point for the government and its dependents is an act of consumption, which means a using up, a loss of previously existing wealth in the form of capital. .. any fresh production and employment that results [from government stimulus] is incapable by itself of replacing the capital that was consumed in starting the process. "[1]Basically, government stimulus cannot create new capital out of the already existing capital. It also encourages consumption when saving is needed for the needed capital accumulation. II. Broken Window FallacyEconomics, because of its nature to work with institutions that yield significant amounts of power, is a discipline that has a number of fallacies. One of them is the broken window fallacy, or the tendency for economic policies to be judged only on their short-term and immediately foreseeable consequences. As Henry Hazlitt puts it, however, "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. " Government stimulus is one of the prime examples of how this fallacy is rampant in economic policy. [2]To begin, government stimulus leaves long-term costs that that outweigh the short-term "benefits": "Finally, any attempt at “stimulus” leaves a long-term cost after any short-term benefits have long dissipated. .. fiscal deficits have only a short-run expansionary impact on growth and then become negative. Thus, constantly increasing deficits result in persistently low economic growth and an exploding ratio of public debt to GDP. "[3]Further, the effects on employment can give an example for how government stimulus helps some at the expense of others: "Any jobs supposedly created by the government are actually stolen by the government from someplace else or sometime else. That is, the government can create jobs in an industry through subsidizing it, but jobs will be lost in other industries not receiving such beneficial treatment. Government deficit spending that creates jobs now comes at the expense of fewer jobs during the times when the government runs a surplus. Jobs are shifted through time, but over time there is no net gain. "[4]The Government cannot create capital or wealth - all that government does in enacting a stimulus bill is divert capital from more efficient enterprises to less efficient enterprises under the guise of "increased spending", when the real importance is in increased capital. Further, it follows that for every job the government "creates", another job is lost. Overall, at best, stimulus can only achieve the same level of output as if private industry had been allowed to work; and most likely, the government's stimulus will be less efficient, meaning that the recession will be worsened instead of improved. III. Empirical EvidenceEconomic truths can be established through axioms, but it is many times argued that empirical evidence is needed to show the validity of an economic argument. For example, the most current US economic stimulus is a prime example of this: ". .. The administration’s promise that the [ARRA] would keep unemployment rates from reaching 8.8 percent and would create some 3 million jobs - 90 percent of them in the private sector - did not materialize. " Further, "From 2008 to 2009, the ratio of the deficit to Gross Domestic Product (GDP) rose from 3.2 percent to 9.9 percent. This 6.7 percent massive dose of fiscal stimulus represented the largest deficit burst since 1942. .. . If demand-side stimulus worked, the economy’s growth today should be China-esque. " But, it hasn't. It has been the slowest recovery in modern (post-WWII) history. "[5]Government stimulus creates debt - there is no question of that. However, debt itself, especially in large debt-to-GDP ratio amounts, can slow economic growth because of the need for large taxation to even make minimum interest payments. There are countless examples of countries that experienced stagnating economies as a result of large amounts of debt. Sources[1]: . http://mises.org...[2]: Hazlitt, Henry. Economics in One Lesson. [3]: . http://www.forbes.com...[4]: . http://www.forbes.com...[5]: . http://reason.org...