But this may all be too old-fashioned thinking, for our modern day nation. After all, Benjamin Franklin, today, would find a nation of debtors, not savers. Thomas Edison would find a nation where the opportunities for success are not nearly as important to folks, as their immediate rewards. Will Rogers would find a nation where nearly 50% of the voting age electorate even bother to get up and go vote in Presidential elections (and less than 40% will bother at all during the mid-term elections).
So last week, when Nancy Pelosi explained that extending jobless benefits “creates jobs faster than almost any other initiative you can name,” old-fashioned folks like yourselves probably just wanted to reach for the Tylenol. And I can understand why.
It's because common sense tells you that this is a fallacy. If extending unemployment benefits creates jobs faster than any other initiative, why not increase the number of unemployed also, so that more unemployed benefits could be distributed to more and more folks, and therefore more jobs would be created. Any of this making sense yet?
Of course not. Pelosi's reasoning, for her seemingly ridiculous contention, is based on the theory of Keynesian economics. They call it the “multiplier” effect. This theory presupposes that for every $1.00 in government spending (in this case it is unemployment benefits), there will be a greater than $1.00 economic activity that results.
For an example of this “multiplier” effect, let's say the government builds a courthouse. The money it spends for building the courthouse turns out to be income for a construction worker who now spends more money on groceries, a new washer and dryer, or new car. Those businesses selling the groceries, new washers and dryers, and new cars may need to now hire additional cashiers or salesmen. Those newly employed cashiers or salesmen may go out then and buy new clothes, furniture, or put a down payment on a house, and so on and so on. You can see from this example how this “multiplier” effect works.
Now, yes, government spending can stimulate the economy, but not all kinds of government spending will. For example, despite an $820 billion government stimulus bill last year, the economy has shed more than 2 million jobs. And those proverbial, shovel-ready, construction jobs? Those have fallen by 450,000 since the stimulus bill passed, and unemployment has risen to 9.6%, not including those discouraged workers who have given up looking entirely.
Technically, Pelosi is correct, but again, it is a fallacy. Extending jobless benefits does support local economies because folks have more money to spend. But this is like giving $5 to your wife or husband. Yes, they have $5 to spend now, but you didn't boost your household income by $5, you merely redistributed the $5, from your hand to theirs, and you have $5 less to spend now, but they have $5 more.
Government spending works the same way. It doesn’t boost national income or our standard of living. It merely redistributes income, less the cost of the bureaucracy to manage it all.
You see, the government cannot inject money into the economy without first taking money out of the economy. This is because government spending (or “stimulus”) comes only from debt, taxes or new money.
When the government borrows money, there is less money available for borrowing by businesses, to invest and create jobs. When the government raises taxes, it simply transfers dollars to itself, from consumers, so that it can be redistributed back to them in some form of government spending. And if it's new money that is needed, then just remember that printing more and more dollars directly diminishes how far families can stretch a dollar, because a dollar will be worth less and less (increase supply of dollars equals a decrease in demand for dollars).
And if you are still not ready to understand that the government must stop spending, remember that we are already $13 trillion in debt and, at the current level of government “stimulus”, we will be $20 trillion in debt by the end of this decade. If the Keynesian economic model worked, then all of this government spending, even during boom times, would always be justified, whether we were taxing, borrowing, or printing the money. But it doesn't.
Pelosi is not only the first woman Speaker of the House, but Obama has said that she is “going to go down as one of the greatest Speakers of all time”. The Economist magazine even called her “the most powerful woman in American history”. If this is true, and she truly would like to discover an initiative that creates jobs faster than any other, she should support cutting taxes on small businesses and allow folks to keep more of the money that they earn. Extending unemployment benefits as a means of stimulating the economy will achieve a modest, temporary effect, but can we aim a little higher, Madam Speaker, before your temporary solution becomes a permanent problem?
Louis R. Avallone is a Louisiana native, attorney and small business employer in the construction industry from Shreveport. He can be contacted at email@example.com