The Government Stimulus Sugar High

The US government has pumped trillions of stimulus dollars into the US economy giving us a massive sugar high. It felt good at the moment, but after the initial rush, you always experience a crash.

It looks as if we’re already coming down off the high. May retail sales disappointed, dropping 1.3% after big stimulus-fueled gains in March and April. Meanwhile, over the last two weeks, weekly unemployment claims have jumped back above 400,000.

In an article published by the Mises Wire, economist Daniel Lacalle said the diminishing returns of stimulus plans are very evident.

Artificially boosting GDP with large government spending and monetized debt generates a short-term sugar high that is rapidly followed by a sugar low. The alleged positive effects of a $1 trillion stimulus plan fade shortly after three months.”

And here we are.

Eating a lot of sugar can give you a quick energy boost, but it does nothing to strengthen your body for the long term. It doesn’t build muscle or improve endurance. In the same way, stimulus gives a quick economic rush, but it doesn’t feed capital investment, the key to long-term growth.

According to Lacalle, history reveals a $20 trillion fiscal and monetary boost is expected to deliver just $4 trillion in real GDP recovery. That sugar high is followed by stagnation, with new record levels of debt, weaker productivity growth and slower job recovery.

Deficit spending is mostly devoted to current spending, which leads to an almost negligible potential growth improvement. If any, evidence suggests fiscal multipliers are poor, even negative, in highly indebted and open economies.”

But that doesn’t stop politicians from running the stimulus pump. In the US, President Joe Biden is pushing for a massive infrastructure plan, and European politicians are planning similar schemes across the pond.

If history serves as any indication, we can expect that the promised “big bang for the buck” will turn out to be a fizzle.

In 2014, the EU launched the  European Commission’s Investment Plan for Europe, commonly known as the Junker Plan. It was conceived as a € 315 billion infrastructure investment and stimulus plan. According to the EU, this ambitious stimulus had a total impact of +0.9 percent in GDP and added 1.1 million jobs between 2014 and 2019 with a total investment of  €439 billion. Lacalle called the return on invested capital “beyond poor.”

And this plan targeted investment projects expected to yield real economic returns. It wasn’t simply handing money to consumers for them to spend on imported goods – a la US pandemic stimulus checks.

But failure has never deterred government planners from repeating the same debacle over and over again. The hubris of central planners leads them to believe that they can make it work this time if they just tweak the plan a tad. As in the US, government officials and central bankers in Europe have launched stimulus plans to boost the post-pandemic recovery. They are making big promises, but Lacalle doesn’t buy it.

Can we really believe in an impact of 4% on GDP in three years from these European funds as the average consensus estimates when the Juncker Plan generated—if we believe it—0.9% in five years?”

The answer to the question should be self-evident.

When it comes to stimulus, most people forget that it has to be paid for. Government doesn’t have money of its own. It has to take it from the private sector before it can spend it.  It’s either taken through taxation today or borrowed and taken through taxation tomorrow. And when you tax corporations and “the rich,” you’re not targeting consumption. This is money that would have been invested. It would have funded new plants and equipment, research and development, expanding staff, and other investments. As Peter Schiff said in a podcast, Biden wants to take this money out of the private sector and have the government spend it.

So the opportunities that government is going to create and provide to the public are going to be at the expense of the opportunities that the private sector would have created and provided if it had the resources to do it.”

That raises a question: what is a better way to create opportunities and economic growth? Free markets or government bureaucrats and central planners? Peter said we know the answer.

Every single country that has tried to centrally plan its way to prosperity has been a complete and utter failure. The way to have opportunity and economic growth is to have more resources in the hands of the private sector and to limit as best as you can the resources that are consumed by government.”

Lacalle spells out the reality. “Cheap money, increased public intervention, and massive stimulus plans have not worked as drivers of productivity and potential growth.”

The path to stagnation and zombification was already a problem in 2018. We need private investment and free trade to boost productivity. We need open economies with a thriving entrepreneurial spirit, not an economy based on spending and debt. The problems created by the chain of the stimulus of the past years are clear: elevated debt and weak growth. More spending and debt will not solve them.”