Pradeep is wrong

Background: Pradeep Srivastava is a frequent letter writer to the Detroit News. This letter prompted my online comment:

I personally think the tea party is like a tea kettle that got overheated and as a result makes a lot of noise and generates a lot of steam that simply escapesto the atmosphere ("Tea party toppling the elites," Oct. 2). Yes, people are angry and frustrated because of the stubbornly high unemployment rate. But the tea party people don't understand economics 101. How can they expect to produce more jobs by reducing government spending at a time when the economy is still trying to recover from the Great Recession? If the consumers are not spending and the businesses are not spending, the government has to be the spender of the last resort to stimulate the economy to produce jobs. Pradeep Srivastava

Pradeep claims the Tea Partiers don't understand Economics 101. Pradeep is the one who doesn't understand. Government stimulus spending doesn't work. It didn't work when tried during the administrations of Hoover, Roosevelt, Ford, and George W. Bush and it didn't work for Obama. Money to spend is not magically manufactured out of thin air. It comes from borrowing or taxes that takes money directly out of the hands of consumers and investors. So when government spends $800 billion, it is merely redistributing the money from one group to another - usually a politically connected or favored group. This leads to misdirected investments which is what contributes to the recession to begin with.

According to Pradeep, consumers and businesses are not spending. According to the Commerce Department's Bureau of Economic Analysis, consumer spending increased during the downturn, not decreased. However, what decreased was private investment. This is understandable given that downturns occur due to the bursting of bubbles created by over-investment in markets. Over-investment encouraged by government policies. The bursting of the bubble allows for a correction and pulling back investments is a natural reaction. Once the correction occurs, investment restarts.

Government stimulus spending does several things to hurt this process. First, it removes money available to private investors through borrowing. The more government takes, the less available to private investors. Second, it spends that money as it (not the market) sees fit and re-plants the seeds toward the next downturn that seeks to correct the previous poor investments.

Pradeep may have mastered Mythology 101, but he slept through Econ.

[Online comment - The Detroit News. Posted 10/15/2010.]