Obama plans to "spend our way" out of downturn

Let's try a quick thought exercise. Imagine that you earn about $32,000/year at your job (that's the 2008 median salary here in the US). Now imagine that you've somehow managed to get approved for a mortgage on a house worth about $320,000. For simplicity, let's pretend you got one of those fancy no money down mortgages. Suddenly your employer cuts back your hours; you still have a mortgage payment to make but you no longer have the income on which you've come to rely. Imagine the bank's response if you told them "Don't worry about it, I'm going to spend my way out of this."

This is essentially what President Obama said today in front of the Brookings Institution in Washington, DC, in spite of the fact that our federal government finds itself in the very predicament outlined above.

Without giving a price tag, Obama proposed a package of new spending for highway, bridge and other infrastructure projects, deeper tax breaks for small businesses and tax incentives to encourage people to make their homes more energy efficient.

Government stimulus NEVER works. By any sane metric, the most recent round of stimulus has been a colossal failure with a true unemployment rate presently floating around 17%. Huge public works projects did not work in the 30's and there is no reason to believe that this time around would be any different. The reason is quite simple; public works projects are kind of like summer jobs but worse. Once the project is completed everyone is once again out of work with long-term prospects that are no better than they were before the government came to the rescue. To further compound the problem, resources must be taken away from the productive segment of the economy (i.e. the private sector) to pay for this government largess.

Common sense tells us that when we are in financially tough times we must cut our household spending, save money wherever we can, and try to pay down debt as much as possible. No matter what anyone tells you, you cannot spend your way to prosperity and it is insane to suggest that you can solve a problem brought about by too much debt and too much spending with more debt and more spending.