The View From 1776
Thursday, February 05, 2009
The Muddled Theory Behind Stimulus Plans
Macroeconomics is carrion for self-interested political vultures.
A few lines of quotation:
If the government borrows the money for the stimulus, then it will either have to print money later or raise taxes to pay it back. If the government raises taxes to pay for the stimulus, it will, in effect, be robbing Peter to pay Paul. If the government prints the money, it will increase inflation, which will decrease the value of the dollar. That would, in effect, rob Paul to pay Paul back with devalued currency.
Taking money out of the private economy—either through taxes or inflation—and spending it in a way that doesn’t offset the loss of money with real economic gains is worse than doing nothing…
“Stimulus” spending often does more harm than good, because it takes more money out of the system than it creates and thereby destroys jobs and leads to stagnation and diminished prosperity for all.
Hayek, who famously debated Keynes in a series of articles after the release of “General Theory,” gave what I believe to be the most devastating critique of government action to stimulate “aggregate demand.” Hayek viewed the boom and bust of the business cycle as primarily a monetary phenomenon created by governments’ artificial inflation of money and credit.
Sound money policy, conversely, allowed the disparate knowledge of millions of economic actors to be conveyed through the price system, rationally allocating capital and labor through relative prices. The problem with government attempts to manipulate the economy through fiscal policy—spending that takes resources away from those who are productive and redistributes it to politically favored interests—is that it is audacious. It assumes that government knows better how to spend and invest than individuals acting in their families’ best interest.