Economics and common sense.(THE LAST WORD)(bailouts and stimulus program)(Column)

Common sense tells us that government cannot resuscitate the American economy and restore it to good health by spending more money and going further into debt. The government cannot spend money for its "bailout" and "stimulus" programs, after all, without siphoning the money out of the economy in the first place. It does this not just through direct taxation but also through borrowed money that is created out of thin air by the Federal Reserve. The latter approach has become increasingly popular in Washington, since it enables big-spending politicians to spend more money without raising taxes.

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But unbeknownst to most Americans, the Fed's expansion of the money supply is in effect a hidden tax: the injection of more money into the economy diminishes the purchasing power of the dollars already in circulation and causes the price of goods and services to rise in terms of dollars. Put simply, this money expansion is inflation and one of its effects is rising prices--though there is a lag between the time inflation occurs and its effects.

If the government really could jump-start the economy by creating new money and pumping it into the economy, then the path to economic recovery would be simple enough to follow: the government would merely need to create unprecedented amounts of money through the Federal Reserve and then give the money to the American people. After all, there's no reason why the Fed could not create enough new money to make every American citizen a millionaire or a billionaire many times over. And instead of printing checks and waiting for the Postal Service to deliver them, the federal government could even have the money dropped from airplanes or helicopters in order to get it into the hands of cash-starved Americans as quickly as possible.

Of course, common sense tells us that an inflation of this magnitude would render the dollar worthless. But such common sense is not only lacking in Washington in the advent of the new Obama administration, it has been lacking in that city for a long time. For many years now, the federal government and the Federal Reserve have been operating as if deficits do not matter, and consequently the annual federal shortfalls have exploded in size and this year's federal deficit is expected to be a trillion dollars.

The Federal Reserve's newly created money is not just injected into the economy through federal programs. The Fed has also artificially lowered interest ...