The View From 1776
Thursday, January 22, 2009
Our current economic distress is the product of consuming more than we produce, of presuming a right to instant gratification. The Fed’s flooding the market with fiat money enabled those character deformations. All government stimulus programs - those of President Bush and of President Obama - promote this self-destructive behavior.
The thrust of government stimulus programs is to promote consumption without increasing production, that is, to continue our personal and national credit-buying binge. We need, instead, to curb spending and to begin saving as much as possible. Only real savings - consuming less than we produce - can provide funding to resuscitate the economy to sound viability, without inflation and economic bubbles like the dot.com implosion and the housing boom and bust.
Read Frank Shostak’s Can Fiscal Stimulus Revive the US Economy?
A few quotations:
[The stimulus] way of thinking follows the ideas of John Maynard Keynes. In a nutshell, Keynes held that one cannot have complete trust in a market economy, which is inherently unstable. If left free, the market economy could lead to self-destruction. Hence there is the need for governments and central banks to manage the economy.
Successful management, in the Keynesian framework, is done by influencing the overall spending in an economy. It is spending that generates income. Spending by one individual becomes income for another individual.
...What is missing in this story is the matter of funding.
...The government as such doesn’t create any real wealth, so how can an increase in government outlays revive the economy?
Various individuals who will be employed by the government will expect compensation for their work. The only way it can pay these individuals is by taxing others who are still generating real wealth. By doing this, the government weakens the wealth-generating process and undermines prospects for economic recovery. (We ignore here borrowings from foreigners.)
The only way fiscal stimulus could “work” is if the flow of real savings (i.e., real funding) is large enough to support (i.e., fund) government activities while still permitting a positive rate of growth in the activities of the private sector. (Note that the overall increase in real economic activity is, in this case, erroneously attributed to the government’s loose fiscal policy.)
If, however, the flow of real savings is not large enough, then, regardless of any increase in government outlays, overall real economic activity cannot be revived.
In this case the more government spends (i.e., the more it takes from wealth generators), the more it weakens prospects for a recovery.
As one can see, not only does the increase in government outlays not raise overall output by a positive multiple; but, on the contrary, this leads to the weakening in the process of wealth generation in general. According to Ludwig von Mises,
“...there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens’ spending and investment to the full extent of it quantity.” (Human Action, chapter 29, section 1)