Oooh! It's oh so stimulating!

Stimulus: If I take my hammer and smash it down on your big toe, that's technically a stimulus. I provided an input that elicits a response, "your screaming and yanking your foot away". That in a nutshell is the problem with stimulus, it is not a positive or negative term, it is neutral, (If I tickle you, you laugh).

Economically speaking, the more appropriate term is "incentive". Government induces desired behavior by the offer of reward. For example, telephone companies may compete in the long distance market (the reward) if they allow competition from other companies within their own infrastructure (the desired effect).

The problem with incentives is that they sometime lead to undesirable results due to the subject behaving in an unexpected manner. CEO stock options were initiated as an "incentive" aimed at producing higher and better CEO productivity. The problem was, that as CEO's soon learned, one could induce higher stock prices (the desired effect) through bad business decisions, claim the reward, and bail before the bottom fell out. The long term result being stinking rich (and retired) CEOs, and shaky and unmanageable companies.

Let us take a theoretical example of "economic stimulus" through the use of government spending (admittedly the numbers are completely made up).

The US government implements a $1 Trillion dollar stimulus package along the lines of the old WPA. The project: The maintenance and upgrading of the federal interstate highway system, federal buildings, and the like. We will grant them the same effectiveness as the old WPA in creating 3.3 million jobs paying a "security wage" to the recipients at the going regional rate. We will also grant the same time period of the old WPA of 8 years (1935-1943).

So, the government creates 3.3 million jobs for an 8 year period. The question then becomes what happens when the money and jobs run out? The government through the use of expenditures can only provide economic support while expending funds. The system is not self-sustaining... the government produces an artificial market...withdraw the funding and the whole house of cards comes falling down. Without WWII... we would either still be running the WPA or long since bankrupt (or socialist). The WPA was only made unnecessary by the economic stimulus induced by the war.

If the stimulus undertaken by government simply 'artificially' creates the desired end-state (employment) we are no better off than we are now, in fact we will be worse off, as we will be forced to continue pumping money into the programs established. Government action must be focused on those areas that can produce long-term positive effects in the economy, anything else is just a hand-out.


Think about it.