FAIRFAX, Va. -- A consensus is building that America's economy is sliding - perhaps plummeting - into recession. In December, the unemployment rate jumped to 5 percent, up three-tenths of 1 percent from November. And, of course, investors are now growlingly bearish.
To no one's surprise, politicians are rushing in with plans for helping the economy. Democrats and Republicans in Congress last week reached a tentative agreement to put more money into the hands of ordinary Americans in hopes that they will spend - not save - it, thereby boosting the overall economy.
Such "stimulus," however, is futile. Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes or from borrowing, or is newly minted.
If it comes from taxes, the value of Jones' stimulus check is offset by the higher taxes paid by Smith, who will then have fewer dollars to spend or invest. If Uncle Sam borrows to pay for the stimulus checks, this borrowing takes money out of the private sector. Any dollars borrowed - whether from foreigners or fellow Americans - for purposes of stimulus would have been spent or invested in other ways were they not loaned to the government.
The only other means of paying for such stimulus is for the Federal Reserve to create more money. Unfortunately, this option leads inevitably to inflation. All Americans wind up with more dollars in their wallets but also paying higher prices in the stores.
Stimulus funded with newly created money is especially harmful. Most obviously, the inflation it causes prompts investors to flee the dollar. But because inflation can take time to show up, injecting new money into the economy can create a temporary sense that consumers and investors are wealthier than they really are. Such a false sense dangerously delays the necessary pruning of unfruitful investments. A bad economy is prolonged.
"It's only when the tide goes out that you learn who's been swimming naked." That saying, credited to Warren E. Buffett, points to the important - if painful - role that recessions play: moving money from bad investments to sound ones. Delaying this adjustment with the hallucinogen of easy money does no one any favors over the long run.
