Why stimulus attempts fail

When a government spends money, a few things happen:

  1. it competes with the private sector for money, driving up inflation (or interest rates)
  2. it competes with the private sector for products and services, driving up costs
  3. it competes with the private sector for land, driving up property prices
  4. it competes with the private sector for workers, driving up salaries

During a boom, these are all bad things — when inflation, costs, and salaries are already too high, government spending just pumps more air into the bubble, leading to an even bigger bust later on (as we’re seeing this time around).

During a bust, it’s a different story. With the spectre of deflation and negative interest rates, more competition for money is a good thing. With companies laying off workers and struggling to stay afloat, more competition for products and services is a good thing. With a collapsing property market, more competition for land is a good thing. And with a huge pool of un- or under-employed workers, more competition for labour is a good thing.

So with so much potential good, why are stimulus packages usually a bad thing?

It’s all in the timing

Spending enough money to actually stimulate the economy out of a recession takes a lot of time. Sure, governments can spend some fixing existing roads and bridges, repairing sewers, etc., but that’s chickenfeed. To spend serious money and put people back to work, they need to do big stuff like new high-speed rail lines or highways, convention centres, etc.

Now, stop and think for a second.

Let’s say that you have access to $20B, right now, to build a high-speed rail line down the U.S. West Coast from Seattle to San Diego. When can you spend it?

First, you need to have public hearings.

Then you need to plan the line.

Then you need to negotiate with all the governments along the way.

Then you need an environmental assessment.

Then you need to put the work out for tender.

Then you need to expropriate some land, and deal with the court challenges from people losing their homes, parks, etc.

Then, 10-20 years later, you can start construction.

Granted, that’s an extreme case, but even something as simple as a new convention centre takes several years from first planning to the start of construction, with design, approval, tender, environmental assessment, etc.

Inflating the next bubble

And there’s the problem. Maybe we’ll still be in a bust in several years, but maybe .. just maybe .. we’ll be in the middle of a world-wide boom.

Then all the money that governments are committing now will go not to pull countries out of the current recession, but to inflate another bubble that could make the next recession even worse.

Are there any options? We could try to plan stimulus packages during the boom, not during the bust, so that they’re ready to go when we actually need them. The problem is, how do you predict a bust 5-10 years in advance? Are contractors and workers willing to wait an uncertain number of years to start work until the next recession is declared?

That is why stimulus attempts mostly fail.

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