Mises Daily Articles
Stimulation by Government
The great failing of the Obama administration is that it is packed with people who show no apparent knowledge of the essential truths of liberal theory. That theory — which is the core of the American political contribution to, and the driving force of, modernity itself — is that freedom is the foundation of and the reason for social and economic flourishing. All evidence suggests they know nothing of this.
Obamites hold the opposite view, the one advanced by the pharaohs and emperors of old, all the way through the Talibans and Hugo Chavezes of our own time. It is the view that nothing is beyond the competence of the state and its great leader. Particularly in economic affairs, these people have a wildly inflated view of what the nation's chief executive can accomplish through sheer will.
Liberal theory teaches that one truism of government is that whatever it does, the results end up making the problem not better but worse. I'm thinking of the war on drugs, the war on poverty, the war on illiteracy, and the war on terror. So it is with the war on recession. Already it has given us a record of failure, not just for the most recent year but really dating back to the 1930s.
A hundred years ago, liberal theory warned against the central bank on grounds that it would create inflation and generate instability and political corruption. All that happened. Liberals warned against the attack on the gold standard in the 1930s, and were proven right again. So it was for Bretton Woods and also for Nixon's final creation of unbacked currency. They were right again.
But do Obamites learn from history? On the contrary, they are completely blind to it.
Intellectual failure is at the root of the problem. Note how the administration invokes economic theory in defense of its policy of wholesale national looting. In this case, bad economic theory works as a cover for acts of despotism. In the end, this is how the theoretical errors of J.M. Keynes end up having utility for governments.
But one aspect of this has not received enough comment. It concerns how the state is using the excuse of stimulus to help not society but itself. The state is certainly being stimulated here, but the private economy — the only real source of social wealth — is being drained in many ways.
The most direct way in which stimulus is helping the state is by transferring resources from the private economy to the state itself in a zero-sum game. From Moody's comes direct evidence. While the rest of the nation's economy is shrinking, the economy of Washington, DC, is growing at a 2.5% pace. Northern Virginia and suburban Maryland are sharing in the glee, as government gains at the expense of everything else.
One of the great lessons of liberal theory concerns the extraordinary capacity of free exchange to create wealth. Trading makes both parties better off. Saving makes resources available for investment. Investment creates jobs that yield more products for people to purchase. Through this mechanism, the West grew rich.
The economics of stimulus are not as complicated. They amount to taking from some and giving to others. There is no wealth creation at all. There is no magic "multiplier" to turn stones into bread. The economics of stimulus is value destroying, because property is pried loose from owners, who put it to socially useful purposes, and given to government so it can pass it out to friends.
This process is costly to overall wealth production — and most of those costs are unseen. We will never know what kind of real stimulus could have taken place had the property been left in private hands. What jobs might have been created, what investments might have been made, what kind of business expansions might have taken place? We will never know.
Phony stimulus can take the form of direct transfers of wealth, or it can take place through the creation of debt, which ends up smashing the value of the currency in which people keep their savings. This introduces economic chaos that no one can control once it begins. The private sector is diminished.
The public sector, on the other hand, thrives on the unjust loot. The money it gets amounts to a direct infusion. How much of the stimulus helps the public sector? If you consider the private companies that are receiving public aid, it is 100%, as formerly capitalist enterprises are nationalized through the back door. Yet because private companies are getting the money, Obama believes he has bragging rights!
This phony stimulus seriously skews the job market as well, as people turn away from private-sector employment and look to government to provide no-risk employment. Really, this stimulus plan amounts to turning the hourglass upside down.
Bernanke is warning us that we are in a severe contraction right now, but the warning applies not to him or the rest of the public sector. They are all quite gleefully expanding, actually.
Government stands to win, while the rest of us will lose. Even if it had the perfect cure for recession, government has no incentive to implement it. Its prescriptions for the ailing economy are no different from the rest of the public sector, which serves itself at everyone's expense.
Indeed, government loves economic downturns. For decades, the private economy has been outrunning government. The private sector has taken over most of the command posts in society, from security to communications to all forms of technological progress. This has annoyed the state to no end. Now is the time for reprisal.
Economic depression is good for the state. Even if the state knew how to end it, why would we suppose that it has the incentive to do so?