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Does Government Spending Bring Prosperity?

Mises Daily: Thursday, August 27, 2009 by

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[An MP3 audio file of this article, read by Floy Lilley, is available for download.]

Many leaders in high places now [1955] promise us that our government will never again permit poverty and depression to devastate our land. They propose more government spending as a cure for every economic evil. And millions of people believe that such a program will work.

The underlying philosophy behind political spending is not new. Similar ideas have appeared throughout all history. They came to full flower shortly after the economic collapse of 1929, when unbalanced budgets were generally accepted as necessary economic measures for relieving those in distress. You could not let innocent people starve, could you?

People pointed to idle factories, unemployed workers and their unsatisfied wants. All we need to do, they said, is to get the government to start priming the pump. A little government spending would provide the would-be workers with the wherewithal to buy the things they desperately need. This would encourage businessmen to put the unemployed to work in the idle factories. This solution sounded so simple, and its political appeal was apparent. So we tried it.

People just plumb forgot all that economists had ever taught. Many desperate persons reached for whatever share they could get of the apparent prosperity that followed. Until war changed the picture, the price they paid was chronic unemployment by the millions. Are we now asking for a repeat performance?

Most people seem to forget that the government can pay out only what it borrows or collects in taxes. They also forget one of the most elementary facts of a free economy — men who will not accept going wage rates must remain unemployed. Likewise, they fail to understand the real causes of depressions. A logical examination of pertinent data would show them that it was Federal Reserve money manipulation that brought on the depression we all deplore.

We Americans truly need to know some very simple economic facts. No free man works, buys or sells unless he fully believes that such action will bring him greater satisfaction than he could enjoy if he did not take that action. This means that in a free economy no man ever takes a job at any wage unless he believes he is better off working at that wage than he would be if he did not take it.

Likewise, no employer ever employs a man at any wage unless the employer feels that he will better his situation by employing that man at that wage. So, in a free economy, employees and employers believe that they have the best available terms. When they feel otherwise, they shift jobs or employees.

In the same vein, no woman ever buys a dress unless she believes that dress will bring her more satisfaction than any other use she could make of the same amount of money. On the other side of the transaction, no storekeeper ever sells a dress unless he places a higher value on the money he receives than he does on the dress he sells. As a result of the sale, both buyer and seller are happier.

Thus, in a free economy, every freely made transaction benefits all participants. Consequently, any interference with freely made transactions must result in a decrease in the satisfaction and happiness of all persons concerned. An economy that is free from restricting regulations thus permits its people to enjoy the greatest happiness they are capable of producing.

The Proper Sphere of Government

However, in order to enjoy the full pleasures of prosperity, it is necessary for peaceful people to be protected from all robbers, thieves and fraudulent schemers who seek something for nothing at the expense of their fellow men.

For this protective purpose, men have instituted governments. Governments, like all valuable assets, have a price. This price is collected in some form of taxes. Reasonable taxes are a legitimate expense for all protected persons, property and production. Taxes are like insurance premiums. In fact, a good government might be called a form of life, fraud and robbery insurance. It is as necessary for modern society as accident insurance is for every car driver of moderate means. Without it, the risk of living, owning property and driving might well involve financial risks that only a few could afford.

Good governments permit people to pursue their pleasures and production while protected from the rascals who would infringe on their rights by force or fraud. Taxes paid for this protection are an investment which permits men to pursue their personal satisfaction and prosperity as each one sees fit.

When governments spend money for other than protective purposes, they must first get that additional money. They can only get such funds by one or more of three different methods. They can amass such funds by collecting more ordinary taxes, borrowing from private savers, or simply printing the extra money they want to spend. Most modern governments use all three methods.

Can such government spending increase the transactions and satisfactions of individuals and, thus, the happiness and prosperity of the people as a whole? A most common economic error is the failure to see or realize the complete price of what one buys.

People are too apt to reach for something they want now, without weighing the costs they cannot visualize at the moment. Many fail to realize that more beer and merriment today may well mean no bread or meat tomorrow. So it is with government spending. We see the results of government spending all around us.

Government services are sold at bargain rates below cost. The bureaucrats are good steady customers, and the subsidy receivers spend money more freely than those who earn it. But many do not see the complete price.

They do not see the schools, homes, hospitals and factories that could have been erected if the same funds had been left in private hands. They do not see that present bureaucrats could be private citizens producing goods not now available, and that such an increase in marketable goods would tend to reduce all prices and thus increase the satisfactions and living standards of every buyer. They do not see the taxes that creep into the prices of every loaf of bread and pair of shoes, placing the prices of such necessities beyond the reach of the most needy.

When the government raises the money it spends by borrowing savings or taxing its citizens, it merely transfers spending power from private owners and earners of the money to the political spenders in power. This creates no new wealth. It reduces the amount private citizens can spend while increasing the amount government can spend.

With less money in their pockets and bank accounts, private individuals and corporations must reduce the amounts they spend or invest. Assuming prices and wages remain the same, they must buy fewer goods and employ fewer workers on private payrolls producing what people want most.

Money spent by governments cannot create any more jobs or produce any more wealth than it can when spent by private persons. In fact, it creates less, because both the tax collectors and tax spenders must be paid a commission. Their labors add nothing to the wealth of society. The shift of the money from private citizens to political spenders must result in fewer productive jobs, and thus a smaller amount of goods and higher prices than if the money had been left in private hands.

Pattern of Production Changed

Political spending also changes the whole pattern of the nation's productive forces. If the government spends its money by giving out subsidies to one privileged group, the productive facilities of the country are then partially directed toward satisfying the desires of that group instead of the desires of those who originally earned the money. Many workers and investors must shift from producing goods and services for consumers who earn their money, to producing goods and services for those who first receive the dollars distributed during the government's spending spree.

Then, too, much government spending is not based on the economic principle of getting the most for the least. This permits political spenders to grant privileges to their friends. Such political plums provide more satisfaction and prosperity for nonproducers at the expense of producers. The net result must always be a reduction in the production of wealth.

Any such reduction in the quantity of goods and services available in the market tends to raise all prices and thus reduce the satisfactions and living standards of every buyer in that market. So spending to help one group, laudable as it may seem, does not, and cannot, create general prosperity.

If the government spending is for war or defense, then some of the nation's investors and workers must go to work producing munitions and military supplies. All the savings and workers so engaged are withdrawn from industries satisfying the private needs and wants of individual consumers. The end result, of course, is a reduction in the satisfaction of the needs and desires of all those who prefer consumer goods over war goods.

The nation may have full employment, but individuals must certainly get along with fewer consumer goods. Such lower personal satisfactions have never been considered greater prosperity. The only reason men and factories are ever unemployed is that they will not produce what consumers want most at prices consumers can and will pay.

Both men and factories can always be employed, if they will accept market wages and prices. When they consider these too low and rely on government to pay higher than market wages and prices with funds obtained from private citizens, the immediate result must always be unemployment or lower wages for those formerly engaged in satisfying the desires of those whose money the government now spends.

Unless supported in idleness, these workers will soon gravitate to those industries or pursuits that benefit most from the increased government spending. Their competition will bring wages down to market levels, and then no workers will any longer benefit from the increased government spending.

Any switch of money from private owners to political spenders can only result in a redirection of the nation's productive forces and temporary gains for those who first receive the government orders or subsidies. In the end, a readjustment of the nation's productive forces will become necessary. During the interim, total human satisfactions will be reduced and the general welfare will suffer.

The question now asked is whether a substantial reduction in present government spending would create a depression. Under the present restrictive labor and monetary laws, the painful readjustment might well be long and severe. Under a free economy, with free market wages and interest rates, the necessary readjustment could be quickly made and soon everyone would be enjoying a much higher living standard.

If the government reduces both taxes and spending, it will leave more money in private hands. This money then can, and will, employ more people at higher real wages to make more of what people want most. The nation's productive forces would be redirected toward satisfying the wants of productive persons, rather than satisfying those who were the recipients of government expenditures.

In a free market economy, every worker and investor tends to seek those outlets which will produce what consumers want most, as indicated by the wages and prices consumers will pay. So workers and investors now engaged in satisfying political spending would soon find more profitable outlets satisfying the increased spending of private producers. Everyone would soon have more. That is not a depression. That is prosperity.

Results of Inflation

In cases where the government prints the money, either directly or indirectly, by first printing bonds and then issuing new money with only its own bonds as security, the result is inflation. Inflation is a tax on everyone who owns or is owed a dollar. Its effects are more hidden than those of other taxes.

Another important difference is that inflation transfers economic wealth from one group of people to another group, as well as from private citizens to their government. The inflation tax is a boon to all who owe dollars and a burden on all who are owed dollars. It changes the values of every contract that specifies a future payment in dollars. It reduces the value of the money involved.

This is a temporary boon to the payer but, in effect, a tax on the recipient. Under such inflationary conditions, wise businessmen become hesitant about signing long-term contracts, so necessary for our present-day complicated production system. Government inflationary spending thus places an additional damper on prosperity, over and above all drawbacks and redirection of productive forces brought about by government spending of funds amassed by taxes or bond sales.

Those who first receive the newly printed money are able to buy a part of the nation's production without having made any contribution. They must profit at the expense of all those who have contributed to the total production offered on the market place. Since the rewards of productive contributors are less, some will retire or reduce their future contributions to the market.

Production will be further reduced by the fact that some of the printed money recipients are supported in nonproductive pursuits. Total production must, therefore, be lower. This means there will be less for everyone who spends dollars in the market place.

Taxes which raise prices or curtail private spending cannot increase total human satisfaction. Increased taxes reduce the voluntary transactions of a free people and thus reduce their total satisfactions. Contrariwise, any reduction in government spending and taxing will increase the individual transactions of a free people and thus their individual satisfactions and prosperity.

The Way to Prosperity

Government spending is an expense or burden on total production and human satisfaction. Government taxes are personal economic sacrifices and should be paid only for the protection of life and private property. When taxes are so limited, they are an aid and stimulant to total production and human satisfaction. When they are collected to help some at the expense of others, they are a brake on both production and human satisfaction. Any reduction in government taxes and spending increases the goods and satisfactions available for all those who have dollars of their own to spend.

Competition in the service of consumers is the one and only sure way to produce a prosperity permanently spiraling upward. All political spending for purposes beyond the protection of life and property are a snare and a delusion. They discourage wealth production both by decreasing the rewards of productive workers and by supporting others in idleness or nonproductive pursuits.

In order to keep up the appearances of prosperity, government spending must be constantly increased, with an ever-increasing share of total production going to the nonproductive. If these constantly increased expenditures are not stopped in time, the result will be a runaway inflation like that which took place in Germany in 1923. Government budgets balanced by inflationary spending can but bring a national headache, for which the only permanent cure is the intelligent use of our God-given freedom.