CMM February 24th, 2009
Hat tip to Dick Armey’s editorial on WSJ: “Washington Could Use Less Keynes and More Hayek”
The stimulus screw-up bill, formally named the American Recovery and Reivestment Act, is the product of a particular economic school of thought. It isn’t a “new” idea. In fact, the idea was formally fathered by John Maynard Keynes almost 100 years ago and has been in practice (unsuccessfully!) for centuries. At the core of his theory is the idea that government directed discretionary spending can spur economic growth by creating demand. With doubt being cast on the economy and blame being levied on free markets and stock exchanges, the last couple of years have seen a resurgence of Keynes economic theory. President Obama has been a consistent advocate for this idea.
I’ve previously argued the fallacy of this notion… simply put, you’re robbing Peter to pay Paul. The point can be made that there are some legitimate infrastructure projects that need federal spending, but I’m not convinced that the 1,400 pages of legislation was true to that notion (i.e. reseeding the National Lawn, voter registration aid for ACORN, etc). Building up to the vote, politicians (including President Obama) made emotional and fearful arguments about the necessity of the legislation. In reality, I think they preyed on fear in order to build momentum around the legislation. Will the legislation spur some economic activity? In the short-term, probably so. Will their be negative consequences to the legislation? Absolutely. Will the negative consequences outweigh the short-term benefits? I’d wager yes. And here is why…
The cost of the legislation is near to one trillion dollars. Given the fact that we operate in a deficit (i.e. we spend more than we collect on taxes, tariffs, etc), that means the trillion dollars commitment is currently unfunded. For the short-term, the government can utilize its reputation (i.e. the good faith and credit) to set in motion these plans with little to no capital expenditure. As a matter of business principle, that will only go so far. Ultimately, there must be money to fulfill the commitments. In order to have that money, government has three options: 1. raise taxes, 2. cut spending in other areas, or 3. print more money. Each of these has a negative consequence.
- Raise taxes– Raising taxes is cutting into the discretionary spending of individual citizens. First, it is very unpopular with the citizen being taxed. Second, time has show us that individuals have much more economic impact when spending their own money than the government does when spending it through increased taxes. Thirdly, less discretionary money ont he top means high net worth individuals and companies have less money to invest, pay salaries, etc. Ultimately, raising taxes can deepen a recession and slow recovery.
- Cut spending– When spending is the popular answer to the problem, I am very doubtful that cuts will be an effective solution. Besides, we’d have to look at military or entitlement expenditures as possible cost savers. I don’t think Obama has the political clout or courage to tackle cuts in either area (although, as I’ve written before, entitlement programs have the potential to be far more destructive in the long-term).
- Print more money–As the supply of money increases, the value of money decreases. I won’t get into the complex economic of the point, but basically you’ll find everything costing more…
So the question is, how will we pay for this 1 trillion expenditure? Ultimately, I think it will be a combination of all three. Will it be in the near-term? Probably not. In fact, I think Obama may not face the full consequences of his actions unless he sees a second term. This near-term benefit, long-term consequences is the core problem with Keynesian philosophy. That and the moral danger of the public realizing that they can vote themselves money (in the short-term). The public doesn’t have the interest or the training to really think through the economic consequences of Keynesian theory. To be honest, with today’s news media, they probably wouldn’t have the information necessary even if they wanted to. Besides, why would they oppose these actions? They aren’t worried about long-term consequences… Instead, their self-interest in comfort survival doesn’t consider long-term consequences, even when the near-term benefit is minor.
Usually, I feel lonely when trying to make these arguments, but not today. I have a fellow native Tennessean and Nobel laureate, James M. Buchanan, to look to for guidance and support. Dr. Buchanan argues that utilizing government discretionary spending is masking self-interest and irresponsible fiscal behavior around weak, populist, and purely theoretical intellectual arguments. The near-term benefits are outweighed by long-term consequences like higher taxes, inflation, and budget problems. Aside from that, this type of spending typically leads to new “entitlements,” which further ties the hands of tax payers and the democratic process.
Where will this lead us? In the short-term, I don’t know. So far, we haven’t seen a very strong sign of support from the stock marekt. Long-term, I think my generation is going to carry this burden for years to come.
