When someone (a normal person) loses a job, or gets a salary cut, they spend less.
People learn to turn down the lights, cut out unnecessary expenses, cancel the milk delivery and the lawn service, cut back on driving, and take the kids out of private school or buy at lower prices grocery stores using more coupons, and watch for sales specials at retailers, shopping only for great deals.
But what does our government do when times get tough?
You guessed it, it does the opposite, it spends and spends, and increases its spending.
It has that luxury, it takes YOUR money however to do all that extra spending. It "needs to do that", is their excuse in Washington. The pols need to take your money, for your own good and spend it on projects you do not want or others that will have absolutely no impact on your local area or you, in particular.
It is done for the "common good".
"We will emerge from this recession, a stronger country," is was said.
Now how exactly does that work?
We do not have any funds to spend, we cut back on everything personally, but the government takes our money that we have not yet earned, gives the debt to our children and their children, and we become stronger?
While all this is being done, the government increases the taxes paid by the job creators in our country, small business, and those 10% of the population that pays most of the taxes in the country and this is supposed to allow us to emerge stronger than ever?
This must be one of those fantasy movies (instead of the stark reality we face), in which no matter what is done in the course of the movie, the ending is fantastic, and all problems are solved in the course of 90 minutes.
This will not be the case here, as our system of free enterprise work differently. It actually works by allowing failure to occur. it is sort of like burning the under-brush in an overgrown forest or prairie. When the old stuff burns, new beautiful greenery grows back instantly.
I saw that many times as the farmers or ranchers followed this process, and green grasses and colorful wild flowers took the place of the old growth.
That is exactly what happens in a free economy.
Common sense will tell you that when things are constricting, one does NOT spend more to incur more debt; one cuts back the spending to get things stabilized.
If you lived on $5,000 a month, now you adjust to live on $4,000 a month or whatever the new available amount is going to now be. You do not go out and decide that now, you will spend $6,000 a month to improve your financial position.
The government has actually used this logic, and nobody seems to understand this nonsense!
Oh, I forgot, the government, unlike we in the real world, never pays back its debts, it just raises the allowable debt ceiling, giving itself unlimited spending while we all have to live within our means.
In a speech this week summarizing his administration’s economic policies, President Obama grossly overstated the support these policies enjoy by claiming, “economists on the left and right agree that the last thing the government should do during a recession is cut back on spending.” There are a great many economists who were surprised to learn that, apparently, they now agree with the President.
Reading straight from the Keynesian playbook, Obama justified the creation of multi-trillion dollar deficits by asserting that the government must fill the spending void left by the contraction of consumer and business spending. As one of those mythical economists who do not agree with the President, I argue that it is precisely this type of boneheaded thinking that got us into this mess, and it’s the reason we are now headed for an inflationary depression.
We do not need, nor should we attempt, to replace lost demand. As Obama himself pointed out in the same speech, Americans have been borrowing and spending too much money. These actions created artificial demand, underpinned by the illusion of real wealth in overvalued stock and real estate markets. Given his intelligence and rhetorical training, it is hard to fathom how President Obama cannot notice the inherent contradiction in his argument.
While Obama commended millions of American families for making the hard choices to reduce spending, pay down debt and replenish savings, he later outlined the government’s intention to spend every American household deeper into debt, thereby undermining all the good that personal austerity would have otherwise produced.
Obama also made the clear-eyed observation that the foundation of our economy was unsound and that a sturdier one needed to be laid. To do this, he even asserted that we need to import less and export more. This has been one of my fundamental points. Our economy is unsound precisely because it is built on a foundation of consumer debt. Instead of spending for today, we need to invest for tomorrow. However, we cannot save more unless we spend less. Production requires capital, which only comes into existence when resources are not consumed.
However, by interfering with this process, Obama prevents the very transformation he acknowledges must take place. When the government spends what individuals save, private investment is crowded out. Society is deprived of the benefits such savings would otherwise have brought about. How can we lay a solid foundation if the government takes away all our cement?
This brings up an oft-repeated, but oft-forgotten, point: government does not have any money of its own. It only has what it takes from the rest of us. If individuals repay their debts, but their government takes on additional debt, we are all simply swimming against the tide. All forward progress is lost as private debt is replaced by public debt, which must be repaid by private individuals. Whatever gains individuals hope to achieve are negated by the higher taxes or increased inflation necessary to repay their share of a larger national debt.
Obama claims that much of the additional debt is not going to finance consumption, but rather “critical investment.” This is a vain hope. In the first place, much of what he categorizes as investment, such as additional spending on education, is not investment at all. Yes, an educated workforce is important, but throwing more government money at education will do nothing to achieve this goal. Spending money on education and calling it an investment squanders resources that otherwise would have financed real investments. In the second place, to the extent some government money is invested, those investments will likely be less efficient than those the private sector might otherwise have financed. There is absolutely no evidence that governments have the foresight or incentives to make investments that facilitate real economic growth. “Five year plans” didn’t work in the Soviet Union and they won’t work here. If the government simply builds bridges to nowhere, society gains nothing.
If we are going to rebuild our economy on a solid foundation, the market, not the government, needs to draw the plans. When private citizens invest their own capital, those who invest wisely are rewarded with profits, while those who do not are punished with losses. Bad investments are
therefore abandoned, with capital reallocated to more successful ventures. Conversely, when governments invest money, these checks and balances do not exist. There is nothing to correct bad investments, as losses are endlessly subsidized by taxpayers. In fact, the more a government plan fails, the more it tends to be funded in the hope that additional resources will finally achieve success. Obama himself proves this by allocating still more funds to government-run schools and student loan subsidies. Other examples, such as Amtrak, the New York MTA, the U.S. Postal Service, Fannie/Freddie, and countless others, prove this process is never-ending – until perhaps the bureaucracy collapses under its own weight.
When it comes to government making tough choices, Obama talks a good game, but refuses to actually make any. However, once the dollar finally begins its collapse, he will have no choice but to match his rhetoric with action. It’s unfortunate that we cannot make these tough choices on our own terms, rather than waiting for our creditors to force our hand.
Peter Shiff, economist, author.
