Stimulus II: Just Say No

Congress is, incredibly, considering a second stimulus. The reason: it needs to help states with the problems it helped exacerbate with the first stimulus, as the Wall Street Journal notes. (Hat tip: Matt Welch Reason Hit and Run).

The WSJ explains, gaping state budget deficits were not filled and fixed, but made deeper with federal dollars. States have expanded programs with money due to evaporate in 2011. Acceptance of federal money also means states surrender budgetary control.

The Evergreen Freedom Foundation finds when Washington state accepted $820 million in education stimulus money it effectively insulated all but 9 percent of its $6.8 billion K-12 budget from cuts in 2011-2012. On top of this, nearly 85% of Washington’s Medicaid budget is exempt from cuts, as is 75% of its college funding. The upshot is states now have to scramble to raise revenues to support the spending the federal government imposed with the 2009 stimulus; or, make even larger cuts.

Some governors had the foresight to reject parts of the stimulus. Indiana Governor Mitch Daniels and Texas Governor Rick Perry said no to expanding unemployment benefits.  It was the right move. Expanded benefits mean more state spending on unemployment benefits. Spending that is ultimately passed on to businesses via payroll taxes that depress hiring and wages.

In effect, stimulus spending is accomplishing the reverse of its intent which was to stabilize state budgets, stimulate job creation, and economic recovery. What the stimulus does demonstrate nicely is the dynamics of interventionism, developed by economist Sanford Ikeda.

As Richard Ebeling describes it, when policymakers intervene into markets, markets get out of balance- generating surpluses, shortages, creating  losses or diminished profits, leading to misemployed resources. Rather than reject the intervention policymakers make a case for more interventions to address these  “market failures.”

This  process can continue for quite some time until it becomes unsustainable. Considering the U.S. has  been down this interventionist road for several decades, the real outcome of the never ending bailout  may be to discover our point of financial exhaustion.