Having enacted a $152 billion “stimulus” bill a year ago that stimulated nothing but the national debt, Congress is about to do it again. This time the price tag will be $875 billion—or more.

While the various interest groups disagree over what the hundreds of billions should be spent on, they all buy into the superstition that government spending boosts “demand”. In fact, it does no such thing. A year from now, when the “stimulus” has disappeared without a trace and unemployment is higher than it is now, economists will be claiming that the “stimulus” bill was too small, or was spent on the wrong things, or that “consumers saved the money instead of spending it”. Superstition is notoriously impervious to facts.

The definition of “insanity” is, “doing the same thing over and over again, expecting a different result”. Given the failure of “stimulus” everywhere and every time it has been tried (the U.S. in the 1930s, 2001, and 2008, Japan in the 1990s, etc.), Keynesianism is actually a form of insanity. Accordingly, let’s call the belief in stimulus “stimulunacy” and the people who believe in stimulus “stimulunatics”.

As they battle to the death over the specific allocation of the spending (infrastructure, aid to the States, food stamps, tax rebates, etc.) the stimulunatics ignore the one thing that all such plans have in common. The very first step in every “stimulus” program is for the government to go out into the market and sell bonds.

When the government sells bonds, it takes money—and therefore demand—out of the economy. Then, some time later, the government puts the money back into the economy in the form of spending or tax rebates or whatever. Later, when the data becomes available, economists are shocked, shocked to find that “consumers saved their rebates” or “business investment fell by an unexpected amount”, or “imports increased”, thus completely negating the “stimulus”. Their hopes dashed, but their belief in “stimulus” unshaken, the stimulunatics then call for more “stimulus”.

The fact is that for the government to be able to sell the bonds in the first place, consumers have to save, or businesses have reduce their investments, or foreigners have to sell more in the U.S. Otherwise, where would the dollars to buy the bonds come from?

“Wait!” the stimulunatics cry. “What if the Federal Reserve buys the bonds with newly-created money? Won’t that increase demand?”

The answer is, “Sure—but then you don’t need the ‘stimulus’ program.”

Demand is created by money, and as soon as the Fed creates more money, it creates more demand. Government “stimulus” spending is irrelevant to this process.

“But wait!” the stimulunatics protest. “What if the banks won’t lend out the newly-created money? What if we are in the dreaded ‘liquidity trap’? What if the Fed is ‘pushing on a string’?”

The answer to this one is, “There is no such thing as a ‘liquidity trap’.”

The “liquidity trap” fantasy had its genesis in the peculiar practice of conducting monetary policy against an interest rate target. If a central bank is targeting an interest rate and it gets “behind the curve”, it can lower its target to zero and still not be creating enough money to prevent deflation.

This is what happened to Japan during the 1990s. Japan’s economy sank into a deflationary recession that went on for more than ten years. During this period, Japan, which must have lots of stimulunatics in positions of power, borrowed and spent trillions of yen on “stimulus” programs. The only effect of these programs had was to drive Japan’s national debt up to more than 120% of GDP, about three times higher than that of the U.S.

Eventually, the Bank of Japan abandoned its interest rate target and simply started creating more yen (so-called “quantitative easing”). It was quantitative easing, not Japan’s enormous “stimulus” programs, that eventually eased Japan’s deflation and recession. The lesson is that if you need more demand, you need more money, not government “stimulus” programs to move the existing money around in circles.

There is no limit to the Fed’s ability to create money, so there is no limit to its ability to create demand. The Fed creates money by buying assets. It is true that the newly created money appears in the form of bank reserves. However, it is also true that the Fed buys each asset from someone. That someone formerly owned the asset, and now they have money. Having just been the seller in the transaction involving the asset, that person is in a position to be the buyer in another transaction. If this person decides to stuff the newly-created cash in a mattress, the Fed can just keep buying assets until it gets the level of demand that it wants.

“But wait!” the stimulunatics cry. “If the Fed creates a lot of new money, won’t that produce inflation?”

The answer to this is, “Very possibly. This is one of the problems with an undefined dollar. But ‘stimulus’ spending does nothing to solve this problem.”

Because the dollar is an undefined “floating” currency, there is no way to know how the demand the Fed creates will express itself. The Fed can force nominal GDP to rise, but it currently has no control over how much of the increase comes in the form of inflation and how much as real economic growth.

The undefined, unstable dollar is actually the most fundamental economic problem we face, and was the underlying cause of the current economic/financial crisis. A stable dollar is a prerequisite for a stable, growing, prosperous economy.

So, we must stabilize the dollar. But what if we do that and the economy still isn’t growing fast enough?

While it is not possible for the Federal government to stimulate “demand”, it is possible to stimulate private business investment. It is private business investment that directly creates both employment and GDP growth.

The most potent way to stimulate private business investment in the U.S. would be to abolish the corporate income tax. Based upon recent CBO numbers, eliminating the entire corporate income tax would cost only about $326 billion the first year. This is less than half of the money that the stimulunatics are planning to pour down their various rat holes this year.

Stabilizing the dollar and eliminating the corporate income tax would ignite an economic boom of staggering proportions. This would be real economic stimulus, not Keynesian stimulunacy.