Is Spending the Answer?

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This
week, Congress and the administration once again showed their lack
of economic understanding, as they ramped up spending to record
levels. On the surface, maybe it does look to some like the economic
crisis is a liquidity problem, that the economy is in trouble because
money is not changing hands at the pace it once did in the boom
years. They believe that to get back to a booming economy money
needs to start changing hands again — and the quickest way
to do this is for the federal government to massively expand spending
to pump new money into the system. If this is the extent of their
understanding, no wonder they call for spending, taxing, bailouts
and inflation.

If spending
was the solution, we never would have had a problem. During the
last eight years, we’ve blown up the size of government and
certainly had no want of spending on foreign or domestic policy.
The Bush administration increased spending almost 20% its first
term, and nearly doubled the national debt by the end of the second
term. Certainly the case cannot be made that lack of government
spending created the problem or can be the solution.

This is mirrored
in American households. According to CNN private sector debt is
365% of private sector gross domestic product. Many relied simply
on steady and continued increases in home values to enable spending
and secure more debt. That trend has proven unsustainable and many
Americans are adjusting their finances accordingly. For the first
time, household debt is beginning to fall as consumers wake up to
the realities of paying off debt and living within their means.

Wouldn’t
it be great if the government would do the same?

A lot of capital
and liquidity is out there waiting in the wings as the new administration
is bringing about government uncertainty, a concept discussed by
Robert Higgs as prolonging the Great Depression. In other words,
it is a foregone conclusion that government will act. But, like
a chicken with its head cut off, no one knows which way it will
run, just that it will flail about wildly until it collapses.

Why start a
business, when businesses could face the brunt of an increase in
future taxation? Similarly, why hire a new employee if tax policy
will just force you to fire them later on to stay afloat? Why buy
a house, when you have no idea how future government meddling in
the housing market will affect its value? Why spend at the shopping
mall, or buy a new car when you don’t know how tax policy will
affect your family budget, or if your job will come under the axe
because your employer’s tax burden is increased?

I argue that
these kinds of questions and concerns contribute to the weakening
economy. This type of tax policy keeps capital out of third-world
nations, and now is keeping capital in hiding here in the US. People
are concerned about security and savings again, retrenching their
household and business budgets. The economy could be helped if the
government would just get out of the way and restore sound monetary
and fiscal policies.

See
the Ron Paul File

March
3, 2009

Dr. Ron
Paul is a Republican member of Congress from Texas.

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