Government Stimulus Impossible

In the present economic depression (known as the Global Financial Crisis) politicians around the world are enacting massive programs aimed at ‘stimulating the economy’. They are bound to fail and can only make matters worse.

Stimulus efforts generally take two forms: spending programs or cheap credit. Proponents of government stimulus argue that this spending or cheap credit creates jobs that would not otherwise be created were it not for the stimulus, that those receiving the stimulus money will then spend it elsewhere, and that this spending will continue, creating total spending much greater than the initial round of government spending in the stimulus. This is known as the fiscal multiplier.

But in order to distribute resources, the government must first obtain them. For spending, the state must obtain money through taxation, or by borrowing in the financial markets. To the extent that people are taxed, they are unable to spend or invest that money themselves. The multiplication of government spending must displace the multiplication of private spending. To the extent that the government borrows money, it takes away funding from profitable private projects that are producing goods and services for paying customers, and this at a time of a massive capital shortage!

For lower interest rates, the government must devalue the purchasing power of money by creating money through the printing press, or by an accounting entry on their computer system. This deceives people into thinking that there is more capital available than their really is, discourages people from conserving capital, and discourages savings when it is most needed.

Government stimulus is nothing less that taking money from the many to give to the few. It is like taking water out of the deep end of the pool, and pouring it in the shallow end, in an effort to raise the water level1.

While political leaders and their apologists claim that government stimulus programs create jobs, is this really so terrific?

The government could easily create jobs by paying people to dig a hole and fill it up again. This is surely an effective job creation program. But as human beings, what we want is not merely work, but the fruit of our labour.

There is no doubt that government stimulus creates jobs, but it also displaces jobs. Government stimulus replaces productive jobs with jobs of mere toil.

In a market exchange both parties trade for mutual benefit. An exchange will take place when both parties expect to benefit. In other words, both parties will conduct an exchange if they value what they will gain more than what they will give up.

With a government stimulus program, the government first takes money from the taxpayer and then passes it on to the recipient of the spending. While the receiving party benefits, the taxpayer certainly does not, but because one cannot compare the satisfaction of one person with another, there is no way to say that the transfer increased overall satisfaction.

Indeed, if the spending goes towards buying a product for someone (like a computer or school hall), there is no guarantee that those receiving the product will find it useful or valuable. In fact one can say that the recipient of the product would value the product at less than its price because if they did value the product at more than its price, they would have already bought the product, negating the need for the government to provide it. Since the government has to spend more than the market price on delivering the product (purchasing plus the cost of running the program), one can say that government stimulus programs are guaranteed to destroy value.

Rather than allowing people to search for the best price for their most highly valued goods and services, government stimulus takes money from people and spends it on things they do not want.

Does this mean there is nothing that the government can do to assist in the current economic depression? Certainly not! The one very important thing government can do is go away. That means, cut spending, cut taxes, and cut regulation.

1 This insightful joke is in The Myth of War Prosperity by Robert Higgs, a 49 minute audio lecture (mp3 file, 11.2 megabytes), part of the Mises Circle in Houston: Great Economic Myths, 26 January 2008.

© Danny Haynes

- posted 11 July 09 in

Comments

  1. Ralph Buttigieg, 11 July 2009, 09:28:

    G’day Danny,

    Fred Thompson gives an absolutely hilarious explanation of government economic stimulus in this video. Worth watching.

    ta

    Ralph

  2. David Corless, 13 July 2009, 15:16:

    “The government could easily create jobs by paying people to dig a hole and fill it up again.”

    I believe this is called carbon capture technology

  3. Tim Haynes, 14 July 2009, 11:26:

    Not taking the money in the first place makes a lot of sense.

    Check out my blog about taxation

  4. Pete, 14 July 2009, 23:31:

    Hi Danny, Great to hear from you again.

    You might be interested in the panel discussion debate – The Economic Crisis and How to Deal with It which included Niall Ferguson and Paul Krugman. BTW did you see the Ascent of Money.

    Oh and Dave, we should talk about carbon capture.

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