The government has spent trillions to stimulate the economy. Interest rates are at a record low. Yet American businesses are sitting on top of trillions of dollars of cash, reluctant to spend any of it to grow or hire. Does stimulus not work?

The theory is that recessions are caused by a decline in private consumption and that by replacing it with government consumption the machinery of production will continue to flow and jobs will be saved. By not having to pay unemployment benefits the government’s cost of the stimulus will be partially offset and taxable incomes will remain high.

This theory is credited to John Maynard Keynes during the Great Depression. Today it seems a bit odd that a lack of consumption would ever be a problem with Americans, but this was the case during the Depression for logical reasons. When you are in a deflation goods become cheaper in the future. It pays to delay consumption.

During the inflationary years of the 1970’s consumers were incentivized to buy quickly to avoid having to pay a higher price later. Investments in financial assets, a future oriented investment, declined and investments in tangible assets soared .

When the supply side prescription of a stable dollar and lower taxes was enacted under Reagan, inflation declined, and assets shifted from tangibles to financial propelling the substantial boom in equities that lasted twenty years.

The impact of stimulus depends on numerous other factors. A onetime tax rebate has little long term impact. If uncertainty reigns the stimulus will be saved rather than spent. No one will alter their consumption behavior for a onetime benefit. George W. Bush’s tax rebate of a few hundred billion in early 2008 had no impact. It was laughably small in retrospect, at least by today’s standards.

That leaves the blind believers in stimulus economics like Paul Krugman in a no lose logical loop. If the economy picks up it was because of the stimulus; if it lags or doesn’t respond then it was because the stimulus was too small or the wrong kind.

The “cash for clunkers” cleared off some inventory and gave some incentive for the auto manufacturers to increase production, but this is short lived if the economy is not already poised to rebound. All it will do is push consumption forward and delay consumption later, in one sense delaying the recovery.

The incentives for home buyers ended and home sales crashed by far more than the consensus estimated. In some areas home prices dropped after the program by more than the amount of the ‘stimulus’ credit. This means that the incentive had the unexpected, or at least the unwanted, effect of keeping prices higher for home buyers and delaying the ultimate recovery of the housing market.

A government spending stimulus program may have a positive effect in a small way for a short period of time if the overall confidence in the system is unchanged. But the current administration has so shaken the confidence in the basic system that few are willing to make any long term plans or investments.

Cap and trade, health care legislation, the card check bill, and the record large deficits themselves have most businesses in defensive mode. No one is certain what these bills will cost but they feel certain they will increase the cost of doing business.

The administration’s contempt for the rule of law leaves businesses unsure what the rules truly are. Bankruptcy law was usurped in the takeover of GM and Chrysler. BP may not be the most likely target for empathy but by what authority does the president force a $20 billion settlement fund outside the legal system?

Political hostility towards businesses in general creates a cloud on business and investment. But the uncertainty of playing a game where the rules change every election cycle will counter any stimulus effort the administration can consider.

The simple and obvious logical flaw in taking a dollar from one person and giving it to another and considering this a stimulus remains. This is the common economic flaw of Bastiat’s broken window. We see only where the dollar was spent and erect signs to cheer the projects built by government ‘stimulus’ money, but are blind to the spending that did not occur from the dollar taken to fund the program.

The government can facilitate growth with a sound and stable economy and by protecting property rights, but only a fool still believes they can actually create a job. Even necessary government workers still require a sacrifice from the private sector.

The best stimulus is a sound and dependable currency, low taxes, and clear and consistent regulations. It has proven effective and successful every time it was used, throughout history and regardless of which political party applied it.

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