The Stimulus of Abominations
by Michael S. Rozeff
by Michael S. Rozeff
The federal government is about to pass a law that authorizes $800 billion or so of new expenditures. The Secretary of the Treasury will be introducing other new measures today. More such will be forthcoming. In addition, the Fed's monetary policy will support this spending.
These measures will not turn the economy around in a meaningful sense. The government cannot spend our way to more wealth. Lawmakers and bureaucrats are empowered to make laws and enforce them. They are in no position to do what millions of businesses do, which is find out what we want, produce it, and distribute it at affordable prices. They are in no position to select and invest in effective capital goods that make production more efficient and raise real wages and incomes.
It is not that the government cannot print money and spend it, and get others to borrow and spend. It can. It has. It will. The government can get every post office in the U.S. painted, if it wishes. It can stimulate the paint and paint brush businesses for a while.
It is not that the government cannot make the unemployment statistics look better (usually after a considerable lag). It can. It can hire the unemployed to take up paint brushes. Who will pay them? The government? How? If it taxes those who are working, they will produce less and have less to save and consume. Transferring wealth does not create wealth; it discourages the production of wealth. If it borrows, there is that much less available for private investment to meet real needs. If it prints money, it imposes an inflation tax on all those who have money balances and find that prices are rising.
It is not that the court economists cannot eventually find some statistics to crow over. They can and will.
It is not that politicians and court journalists cannot fabricate plausible but fallacious economic stories and blame the free market for all economic ills. They can and will. There is always the fairy tale that every dollar the government spends magically multiplies production. But if the painter's wages are stolen or borrowed from the productive, those negatives offset the spending of the painter.
And if the painter spends money printed up for the occasion by the government, the result is no better than a counterfeiter who passes his bills at Wal-Mart and empties the store. He is stealing from those who have produced the goods that are on the shelves of Wal-Mart. For when they arrive at the store to buy those goods with the money that they have earned while producing those goods, they find that the shelves have been emptied! Their production has gone for naught. To get what they want, they will have to work another week, in the meantime using up their inventories of food and necessities. The inflationary supply of money has taxed away their production and made their money-wages worthless.
It is not that all of these powers of government, the academy, and the press cannot ignore history and the clear-headed thinking of great minds of the past, while fastening upon their own ignorant and distorted versions of economics. They can. They have. They do, and they will.
It is that these people of the state, their rhetoric, and their policies, are not directed toward creating a sound and real foundation for growth in real incomes. Their policies are based on extracting resources by force from the productive and using them to build a flimsy straw house that will collapse with the next wind. They offer nothing to encourage saving. In fact, they burden the saver and the productive. Since saving is the source of investment, they offer no fuel for entrepreneurial activity. Since entrepreneurs are the source of employment, they offer no support for jobs that can raise real incomes. Their policies attempt to and may succeed in locking in the ill-made investments of the past while adding new ones. They burden the American economy with vast increases in debt while making the economy lose competitiveness. They ensure that economic activity fails to supply the real needs of the American people. Like vendors of snake oil, they offer fake palliatives and nostrums while the real illness lingers and runs the patient down. Their policies will run down the stock of capital goods in the economy and leave Americans the poorer. We will be less able to maintain our business hallmarks of innovation, drive, responsiveness, and flexibility.
We have a choice: wrong economic theory or right economic theory. We have a choice between Keynesian economics and Austrian economics, which in turn is built upon a lengthy history of correct economics won with much travail and debate over hundreds of years. The Stimulus of Abominations is built upon wrong economic theory. It is built upon Keynesian economics, which is the dominant economics of our time among policy-makers. It conveniently fits their role as wielders of power. It is a Stimulus of Abominations for several reasons. It harms Americans dreadfully. It prolongs the recession. It continues the flawed policies of the past. It completely fails to address those policies and replace them with improved policies. It pays off favored interest groups. It indulges in the whims of the ruling body. It wastes money flagrantly. It flies in the face of the right economic theory, which is the hard-won product of centuries of effort and replaces it with the wrong Keynesian theory. It gets the Obama presidency off on the wrong foot and dashes the hopes of many. It lays the groundwork for more such spending.
In 2008, the federal government passed the following notable measures to address the country's economic problems:
- February 13, 2008. Economic Stimulus Act of 2008. About $160 billion in tax rebates. Increases in mortgage loan limits.
- July 30. Housing and Economic Recovery Act of 2008. FHA to guarantee up to $300 billion in new mortgages. Fannie Mae and Freddie Mac placed under the Federal Housing Finance Agency.
- October 1. Emergency Economic Stabilization Act of 2008. The U.S. Secretary of the Treasury authorized to spend $700 billion on the banking system.
- On February 13, the S & P 500 stock index was 1364. On July 29, it was 1288. On October 1, it was 1161. Seven trading sessions later, it was 885, a crash of 24 percent. At present, it is 871.
It is striking that the stock market plunged by 24 percent in the seven trading sessions after the October 1 bill was made law. A crash of that magnitude is a rare event. Using the stock market as a noisy guide, one would be hard put to argue that this legislation (or the earlier laws) helped the economy. Stock values impound the expected worth of future cash flows. They discount future prospects. If those prospects had improved significantly and investors believed in those improvements, it is unlikely that stocks would have dropped 35 percent between Feb. 13 and October 1.
The President and his economic advisers have chosen Keynesian theory. If you believe in that theory, you will be looking for an economic recovery as Obama's stimulus measures take effect. You will be looking for a stock market rally. As I write this, the stock market is down 4 percent. It is the day after Obama's first press conference. The stock market is a noisy indicator, but it is not entirely irrelevant. It is surprising that the stock market is not down even more than it is. Perhaps investors have already factored in the damage that Obama is likely to inflict in the future. I doubt it, though.
Obama's press conference expresses the wrong economic theory at the outset. It is the theory that consumer spending is the economy's fuel and that without this fuel being burned the economy stops. Conversely, this theory says that if the consumer is fueled up with any kind of job or money, then he can restart the economy and make it run. This same idea, which is the Keynesian idea, has dominated thought around the world for decades, despite its falsity. In the last recession, Greenspan revved up the consumer by printing money. One result was a surge in imports and an incredible trade deficit on current account. Another was the late-departed boom that has brought us to the current condition of the economy. The Greenspan fix was not permanent. It could not be permanent. Printing money does not create wealth. It distorts investment, taxes productive effort, leads to capital consumption, causes a credit boom and speculation, and, after a time, results in the kind of collapse we have seen.
Obama wants to generate consumption. He also calls it demand. This is the wrong approach built on the wrong theory. The right approach is to generate saving. This generates investment in areas of genuine want and need, which in turn generates jobs and incomes on a non-inflationary basis. In this way, real incomes can rise. There can be no genuine consumption without the production that provides the wherewithal to buy the product. The horse must come before the cart and pull it, and that horse is production.
Obama made this frightening statement: "But as we've learned very clearly and conclusively over the last eight years, tax cuts alone can't solve all of our economic problems — especially tax cuts that are targeted to the wealthiest few Americans. We have tried that strategy time and time again, and it's only helped lead us to the crisis we face right now." His certitude is as frightening as his being wrong in every part of this statement. He blames this crisis on the wrong enemy, tax cuts, when they actually helped create some decent growth in the last few years. Those cuts were not targeted to the wealthiest few Americans. That is demagoguery. Furthermore, even Bill Clinton sponsored tax cuts at times. The problems that he fails to mention are that over the past 33 years government spending has ballooned along with an easy monetary policy that lasted for most of that time and tailed off only between 2005 and 2007.
Amid the confusion came a ray of light that was almost immediately snuffed out. Obama said that the savings rate had declined (although he had no notion why it had declined or that the government was in any way responsible for it). He noted that we cannot spend indefinitely without making things. But then he went right on to argue that spending now to create 4 million jobs had top priority, as if this were the only possible way to alleviate the economic distress. And that is how he sees it. It is spending or doing nothing, an alternative he denounced several times and tied to the opposition party. Mr. Obama does not seem to realize the vast economic effects that would result from his leadership in other areas. The federal government is a huge factor in the economy due to its size, its spending, its borrowing, and, not least of all, its tax policies and its regulations. He seems to have accepted the status quo in all of this, while he looks to expand health care and the government's job creation programs. It seems a remarkably narrow vision for a leader committed to progressive change.
Obama is measuring his success by creating 4 million jobs, among other things, and he is prepared to move on more and more spending to attain that goal. Such additional spending is very likely because job creation is a lagging indicator that occurs at the end of a recession or as a new expansion proceeds. In the last recession, total nonfarm payrolls did not reach the 2001 peak until 2005, which was 3 years after the recession ended. This recession is deeper. Results are not going to be quick. If Obama insists on creating 4 million jobs quickly, the costs are going to be very high in distorting the economy and preventing it from coming out of this recession with a sound foundation for future growth.
By the way, the stock market is now off 5.2 percent.
February 11, 2009
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.
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