Impact of Stimulus Spending During a Recession

Government consumption or investment is typically understood to decrease the resources available to the private sector, resulting in higher production costs than would otherwise exist. However, supporters of stimulus programs allege that government spending does not crowd out economic opportunities during a recession in the same way or nearly to the same extent as stimulus spending would during a period of more intense economic activity.

Even if stimulus spending did not negatively impact the private sector, as is alleged to be the case during a recession, there are a few assumptions here worth unpacking.

The first assumption is that putting economic resources to use is more efficient than letting them sit idle. Whether that is true of false, what is the standard being used to determine what a resource’s optimal use is? I suppose someone could argue that, all else being equal, since a person would prefer something now rather than later, by that fact alone it is preferable to use a resource sooner. But that does not address the point that a resource in a complex economy can be used for different purposes in the pursuit of mutually exclusive ends that place over a period of time by different people, some of whom are not even born yet.

The second assumption is that government spending will primarily affect only those resources not being put to use by the private sector. Even if we trusted all politicians to be so honorable in their intentions, I do not think they could target their spending programs with such accuracy.

For the sake of discussion, I can entertain the idea that politicians within a community by and large could operate with an impeccable degree of integrity and proficiency with other people’s money. Even taking that leap, stimulus spending misses the point for why the resources were idle in the first place. The problem did not start with the recession; the economy’s problems can be traced back to the unsustainable boom times, when resources were misallocated. During the boom, entrepreneurs en masse put resources to uses that consumers did not prefer. According to the Austrian theory of the trade cycle, that misreading of consumer preference is typically created by the manipulation of interest rates by the central bank. Regardless of why such a “cluster of errors” occurred, businesses still must put their resources to better use if they want to earn a profit. That requires a certain period of time of idleness for adjustment by entrepreneurs to find profitable uses for resources. Government stimulus stymies that re-coordination process from taking place by perpetuating the very entrepreneurial miscalculations that caused the boom and often by creating more false economic signals.

What happens during a stimulus program is that politicians spend money in such a way that taxpayers would not spend it for themselves.


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