Fredric Bastiat, a French economist, came up with an economic fable called "The Broken Window" that goes something like this.
A young hoodlum heaves a brick throws a baker’s window. The shopkeeper rushes furiously out the door looking for the hooligan, but the boy is long gone. A crowd soon gathers around the shop, and begins to stare at the gaping hole and the shattered glass strewn over the bread and pastries.
After a while, a man in the crowd gets philosophical and reminds others there is bright side. It will make good business for the glass maker.
The philosopher goes on and says the glazier will now have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles.
The logical conclusion from all this would be, at least from the crowd's perspective, is that the hoodlum, far from being a public menace, is actually a public benefactor!
This parable is basis for all Keynesian economics that have existed in many U.S. government economic policies since FDR and is totally based on a fallacy.
On the surface, there seems to be an intuitive logic that proves you can stimulate the economy by "breaking windows" (creating an unwanted demand), leading to increased supply (the perfectly good window that's replaced).
The fallacy is that the crowd only sees the apparent positive effects of the broken window and not the unseen negative consequences (opportunity costs) caused by the broken window: the baker discards the glass-covered bread, the lost time and profit of discarding the bread, the wasted time cleaning up glass, the bakery closes until the window replaced, the $250 lost profit of fixing the window, the $250 shoes the baker can no longer buy, the cobbler's $250 lost sale, the lost purchasing power of the cobbler, and so on.
Had the window never been broken, non of these unseen negative consequences would have occurred AND the baker would still have a window.
The problem with government "pump-priming" economic "stimulus" spending is that most is on useless projects the free-market would never, in 1 million years, waste money on. To pay for these useless projects (broken windows), taxes are raised on consumers and corporations, which prevents that money from being spent more wisely on NECESSARY investments and expenditures such as: new plant and equipment, R & D, advertising, additional staff, new start-up companies, more factory workers, wide-screen TVs, vacations to Vegas, shoes, cars, jets, trucks, etc.
Even if higher taxes are postponed through debt financing, the debt eventually leads to paid plus these useless projects become even MORE expensive because of compounded interest on debt, taking even MORE money out the economy.
Eventually excessive debt to pay for excessive government spending always (without exception) leads to bankruptcy: Ancient Greece, present-day Greece, ancient Rome, modern-day Italy, the defunct U.S.S.R., North Korea, Cuba, Spain, Portugal, Japan and eventually America.
Throughout American history, every time (without exception) the government has tried to "stimulate" the economy through wasteful government spending and higher taxes, it has prolonged economic downturns: FDR's Great Depression Spending (prolonged almost 10 years) Jimmy Carter's Stagflation (prolonged 3 years), Obama's Great Recession ( prolonged ??? years).
Every time America has CUT taxes and CUT government spending economic downturns are over quickly 1919-1921 Depression: (over in 9 months)--President Harding CUT government budget 50% (imagine that) and lowered taxes from 71% to 24%.
Ronald Reagan cut taxes from 76% to 24% but was unsuccessful in cutting government spending due to a Democratic Senate and House. Government spending doubled during the Reagan years, however, tax revenues actually DOUBLED under lower taxes because of the growing economy resulting from the tax cuts (Laffer Curve effect).
An interesting point of history is that Ronald Reagan tried to get the 28th "Balanced Budget Amendment" added to the Constitution. Because of the Democratic House and Senate, Ronald Reagan was unsuccessful.
Reagan's valiant effort to try and circumvent the U.S. Congress by getting 2/3rds of the STATE legislatures to support the Balanced Budget Amendment (100% Constitutional by the way) is one of the many reasons I loved Reagan. He was my hero.
When Republicans finally took back control of the House and Senate in 1994 a Balanced Budget Amendment was again proposed and came within 1 vote, ONE VOTE!!!! from being passed....
America now has a $14 TRILLION national debt PLUS $109 TRILLION in unfunded liabilities because of the 1 lost vote on the Balanced Budget Amendment.
Imagine if that one Senator had voted differently....
Anyway, "stimulus" government spending never can and never will get a country out of a recession. History has taught the lesson countless time in countless countries throughout history.
As Winston Churchill once said, "If we fail to learn from history, we are bound to repeat it." and yet here we go again...
America will either learn this painful lesson or cease to exist trying to prove it wrong.
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