The "Economic Stimulus" Myth
24 February 2009 Harry Binswanger
Obama's "economic stimulus" plan will further damage the economy and result in inflation in the long run. The only "economic stimulus" is economic freedom -- freedom from central planning.
There's no such thing as a "stimulus" to the economy. The closest you could get to that in reality would be a retrenchment of government controls and looting: de-regulation and spending cuts. But even those are not "stimuli" but a lessening of destruction. If I'm extracting a quart of blood per hour from you and I reduce that to taking a pint of your blood, that's not giving you a "stimulus." If I've tied your arms and legs, and I untie one leg, that's not giving you a "stimulus."
But such reductions in damage aren't even on the table, aren't even being considered, so I include that point just for completeness. (And note that any tax reductions not accompanied by spending cuts are not reductions of damage, just shifts in where the blood is being drained from.)
What's actually being called an "economic stimulus" is a melange of programs to increase the damage. They're taking the person tied and being bled and giving him a shot of adrenalin to make him quiver and make his blood flow out faster.
The "stimulus" package is premised on the consumptionist idea that spending creates wealth. But spending only transfers wealth; production creates wealth. Neither buying nor selling creates goods.
Goods are created by the physical alteration of matter. Also, to constitute wealth, a product has to be more than a hunk of stuff: it must be something buyers value. (The significance of that addition will become apparent later.)
Keynesian (consumptionist) economics holds that spending can create wealth when there are idle factors of production--people out of work and factories with a lot of unused capacity. Keynesians reason: "If these people were working and the factories were calling idle machinery into use, more products would be made." In a sense, that's true, but what is ignored is: the reason why the factors of production are idle. There is a reason--it's not just that people have gone crazy (and only government officials remain sane).
For instance, I am now trying to spend less because I can't afford as much as I could (or thought I could) before the crisis. So what is the Keynesian solution? Fool me into thinking I can afford more than I can. Print up new, unbacked money and get it to me so that I will (mistakenly) think I can afford to buy more again. To the extent the "stimulus" package is getting inflated currency to consumers, it is attempting to fake them into making purchases that they can't actually afford.
Now take the business side of things. A car manufacturer has machinery laying idle. Why? Because they judge that they can't make a profit by using it to make more cars. The "stimulus" solution is to fool them into thinking there is a demand for those cars, so that they will produce them. It is supposed to work because the consumers will be fooled into thinking they can afford to buy them.
But the double-fake theory doesn't work. There's been no change in external reality. There's only an illusion created by expanded fiat money. The consumers can't actually afford to buy the cars, and the actual profits of the car producers isn't higher than it was. Yes the car-maker's nominal revenues, in dollars, goes up, but not their actual receipts in real terms. And their costs go up as the newly printed money circulates through the system.
For those who are fooled by the inflation, the net result, in real (not dollar) terms is that they make purchases they can't afford and the producers are fooled into producing at a loss.
The consumers have seen their real wealth shrink, because real wealth is a matter of their hierarchy of values. Suppose my hierarchy of values is that I value having a new computer above getting a high-definition TV. If I am fooled by the "stimulus," I think I can afford both. So I buy both. But now prices rise, and I find I can't afford to pay my rent--something that I valued much higher than either the TV or the computer. So now I have to pack up my TV and computer and move to a smaller apartment. Had I been undeceived about what I could afford, I would have bought the new computer, passed on the TV, and stayed in my present apartment.
Net result? By being faked into buying both the TV and the computer, I am worse off--worse off than I would have been had I stayed in the present apartment with a new computer but keeping my old TV.
The same applies to businesses. If they are deceived into bringing idle machinery into production, they end up worse off than if they had realized that their expanded dollar receipts are worth no more than their old receipts, and that their costs are now rising--as are the interest payments on their borrowing.
We saw all this happen in the 70s. But that's too long ago for concrete-bound pragmatists.
Another point. Savings are spent. All money that is not kept in cash balances is spent. The crucial issue is not "spending" but the nature of the spending. Is money spent on production or on consumption?
Money spent on consumption is a dead-end, as far as creating wealth is concerned. You buy bread and you eat it. The money you spent goes to the baker of the bread, but the bread is gone. If you save the money, that means it is invested. And that means it is spent on production--say to pay wages for bakery employees, who then buy bread. Then they eat the bread. But the bread eaten by an employee is the payment for his labor in creating more bread. And you are paid interest out of the profit.
So, in either case, money is spent to buy bread that is eaten--the only issue is whether the bread goes to sustain a worker making more bread than he eats (since he is hired at a profit) or whether it the bread is eaten with no added production. Productive expenditure makes a profit (on average); consumptive expenditure just uses up products.
To be sure, there's nothing wrong with "using up products." We produce them in order to consume them, for our happiness. But the consumptionist school imagines that savings are not spent at all.
The adherents of this school, which includes everyone with a public voice today, imagine that savings are tucked under a mattress--i.e., hoarded. In fact, however, savings are invested in production.
It is amazing that in this crisis, which is a crisis of over-consumption, over-borrowing, too little liquidity, the government's idea of a "stimulus" is to encourage more consumption, more borrowing, and less liquidity. It is especially amazing when all these points were known and well explicated by the classical economists, from Adam Smith on.
What is needed for recovery is not the chimera of "stimulus"-- provided by faking both people's incomes and the true supply of capital--but a return to reality. And that means: liquidation, liquidation, liquidation.
And that liquidation is exactly what the "stimulus package" is designed to prevent.
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