Sunday, February 08, 2009

Misunderstandings About Government Stimulus

What is government? Ultimately it is nothing more than the entity which claims a monopoly right on the use of force over a given group of people. Government, ultimately, is force. It is using the threat of punishment- backed by force- to either make people do or not do something regardless of their wishes to do or not do it.

That is why some, libertarians come to mind, want to put strict limits on what the government can do, including the circumstances under which it can use force. Constitutionalists are cousins to libertarians, allowing local governments more leeway, but desiring strict and defined limits with meaningful checks and balances on the powers of the central authority.

Opposite them are the statists. The ones on the left are called socialists and the ones on the right are called fascists. Their cousins, varying only in degree and not in kind, are today's Republicans and Democrats. They both support huge and intrusive centralized government power, but sometimes quibble over whose friends should benefit from that vast coercive power. One wants to rob Peter to pay Paul, and the other desires to rob Paul to pay Peter, but both take it as a given that government ought to be robbing somebody (even if, in the case of using debt, it is the next generation they are robbing) in order to finance some end that they believe justifies their means.

I say all this in hopes of getting you to the place where you realize that all this chatter about government stimulus plans is based on a premise, and that premise is a flawed one. It assumes that the libertarians and constitutionalists are wrong about what a central government is supposed to do, and that the socialists and fascists (event the kinder, gentler ones called Republicans and Democrats) are right. The former groups maintain that government exists to protect the rights of its citizens, and the latter assumes that government exists to meet "needs" of basically any sort whatsoever the government itself assumes ought to be met. It may be "affordable housing for all" or it may be national greatness in enforcing "a new world order". Or, in the case of a government stimulus plan, they see the government's job as "getting the economy going".

To Constitutionalists and some of the more moderate libertarians, the best thing government can do for the economy is insure contracts are enforced, protect against theft, including theft by fraud, and otherwise stay small so that more resources are available to the productive private sector. The philosophy of our current government has taken us in the polar opposite direction- a huge government that is in the way of every effort to increase honest productivity, but so huge that it is both unable and unwilling to perform its legitimate core functions of protecting people against fraud.

Indeed, big government is in on the fraud. It facilitates the fraud. It draws its membership from the ranks of the institutions responsible for the fraud. It designates its Peters and Pauls as "too big to fail" which is another way of saying "too well-connected to prosecute". Big government, in need of constant borrowing, so needs big finance that instead of prosecuting fraud in this sector, it actually bails out the insiders to the fraud.

(I am running long here, please catch the rest on the jump by clicking SUNDAY below and scrolling down).


Blogger Mark Moore (Moderator) said...

President Obama says "Of course there is spending, that is what a stimulus bill is". And in a sense he is right. But in total (taking into account not only the present but results into the future) he is wrong, because ultimately there is no such thing as a direct "government stimulus".

Government spending outside its core mission can't make "the economy", when viewed over time, more stimulated. All it can do is increase the current amount of economic activity by subtracting from future activity.

This is what politicians from both private entities which currently control our electoral process have been doing for decades. They have been giving us the illusion of prosperity by artificially stimulating present economic activity at the expense of future economic activity. Now the future is here, and their efforts to push the day of reckoning further forward are so obvious and desperate that even the deliberately misinformed masses are noticing. So they know something is wrong, but since they have been deliberately misinformed, it is difficult for them to get to the correct answer.

Some, like the President, feel that government spending itself will improve the economy. It won't, it will just make it seem better now, like writing hot checks makes one seem to live better than they otherwise could until it finally catches up to them. Still, it is desirable to go into more detail about why government stimulus spending does not really help the economy. To so, we must consider the nature of what is being "spent" in a stimulus. I have already asked you what government is, now I ask you to think about what money actually is.

Have you ever considered what gives value to your money? Since we have a fiat currency, only the faith that those pieces of paper can be exchanged for goods, like eggs, underwear and hammers etc..., give those bits of paper any real value. The amount of those pieces you must give for those real items depends on the relative amount of them compared to the amount of all of those real goods that you want to buy with them.

A good example of this principle in history: Between the world wars, France once occupied the industrial heartland of Germany. The German government at this time had no military ability to repel the French, so they encouraged the workers there to go on strike.

The French left eventually, but in the meantime the industrial production of the country took a nose dive, while the amount of currency in circulation did not. The result was a bout of hyper-inflation. The money was still out there, but there were not enough goods being produced to give the money its former value. The people's real standard of living declined because they were not making as many real goods for one another.

Now consider a government program to "stimulate" the economy. It involves hiring all of the unemployed people in the country to dig holes in the ground and then fill them back up again.

You may protest that the government would never do something this foolish with stimulus money, but in point of fact a) it was done during the Great Depression and b) the proposed stimulus package proposes to extend unemployment benefits, which is to say pay people for doing no work at all. It is difficult to see how paying people to NOT WORK will add more produced goods and services to the economy, which again is how our money gets its value.

That is the problem with government spending. It does not add more goods produced to the economy, but simply reshuffles existing goods to different hands. The government employees who are hired to "stimulate the economy" are in charge of the reshuffling, the private sector employees produce the goods which get reshuffled.

The government workers, far from being the key to stimulating the economy are actually a drag on it, but the people getting the reshuffled goods don't see it that way.

So an abundance of government drags the private economy down, and more workers get laid off. The government responds by adding programs to dig and fill up more holes. Or maybe they send more people to college when there are not enough suitable jobs for the college graduates we already have. Whatever government does with the "stimulus" money they got from others, they will make choices that are less productive than the choices that would have been made if the money had been left in the hands of those that earned it.

That is because 1) the collective intelligence of the free market is smarter than any one group of bureaucrats hammering out a five-year plan and 2) people will always spend their own money with more care and spend other people's money with less care and 3) if the government grabs a big enough share of the earner's earnings some of them will choose to earn less and relax more. This will lower the number of goods and services the economy produces and thus undermine the value of money.

In this case the entire plan is being financed by debt. This is simply a purchase of economic activity now at the expense of economic activity in the future. The world has already shown signs that it is growing tired of participating (via loaning our government money) in the charade.

I also want to point out that even a Republican plan that has 100% tax cuts, unless it is paired with a reduction in government spending, is just making the unwarranted assumption that today's private consumers will make wiser decisions than those of the next generation, so that taking the money of the next generation and giving it to the current one is morally defensible- at least from a utilitarian viewpoint.

For myself, I see no evidence whatsoever that the current generation will be more prudent in their spending than the next one will be, nor in my view is it the government's place to make that determination.

Neither party in Washington, nor the swarms of parasites who fawn for their favor, want to hear the real way out of this mess. Our government, whether the welfare state or the warfare state, is simply too big for us to support it and maintain a viable economy.

The ratio of people producing goods and services in the private sector must grow larger, and the number of government employees who regulate and reshuffle the goods produced by those in the private sector must go down. The era of big government must really be over, or this economy will collapse. At this point, it may collapse anyway.

11:41 AM, February 08, 2009  
Anonymous Chuck said...

This so-called stimulus is a costly Band-Aid on a wound that needs major surgery and stitches. It may work temporarily, but eventually our economy must produce jobs, manufacture things again that the world buys and be able to keep going long-term. Money taken from the private sector (or even printed anew), and then returned won't do it; there is always a net loss of jobs, due to the inefficiency of forcibly removing money from the private sector and providing jobs therefrom, particularly when the jobs are digging & filling holes, as you point out. There must be innovation, entrepreneurship, and risk-taking (with the possibility of great reward) in order for the economy to grow and be able to sustain itself. Government must remove or at least ease some of the shackles of doing business in order to keep manufacturers here, rather than moving them to places where there are no minimum wage, environmental, unemployment, and other onerous regulations that make the cost of doing business here astronomical, and thus unaffordable for most. Case in point: Detroit, where quality has given way to personal gain, unions have demanded too much, management has caved thereto, and others(Honda, Toyota, Nissan) have stepped in successfully to fill the void. As Gordon Gekko said in Wall Street, "In my book, you either do it right, or you get eliminated." Government bailing out those who've done it wrong only rewards and encourages failure.

7:04 AM, February 09, 2009  

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