Sunday, December 21, 2008

A Trillion Dollar Mistake

This is an essay I sent out to my e-mail list. Many of the thoughts have been included in previous posts here on this blog.

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In recent weeks the idea of a massive economic stimulus plan has been mentioned in the news. As the weeks have gone by, the size of this plan has grown tremendously. What started as a now paltry $160 Billion has now grown to an estimated $1 Trillion. This money is to be spent on a number of so-called investments in our nation’s infrastructure. Don’t be deceived. Remember those wild-eyed accusations of Socialism brought up during the campaign this fall? This is it.

During the Great Depression a British economist named John Maynard Keynes tried to come up with a theory to explain what had happened. Classical economics didn’t really have a good answer. Another economist named Ludwig von Mises, had discovered what I believe is the correct theory, but Keynes’ theories captured much more attention from politicians at the time. One of Keynes’ theories suggested that the government could unlock the fear and panic by having the government spend massive sums of money on numerous projects. It was believed that this new spending would “prime the pump” and get the economy rolling again. Unfortunately, this thinking has some fatal flaws.

First and foremost it ignores where the money comes from. In any economy, private investment is used to buy new machinery, build new buildings, and employ new workers. In Keynes’ economy this new government investment would do more of the same thing. So where does the government get the money? They must first borrow it from private investors. If government spending rises by $1 Trillion, the money must first be borrowed out of the pockets of people in the economy, thus private investment must drop by a similar $1 Trillion. So, instead of ABC Incorporated buying new machines, building new buildings, and employing new workers, the government is going to do this.

At first glance, one might think it’s worth the risk and for this strategy if it is just the government spending and buying the exact same amount of money as private companies. However, this is incorrect as well. Government spending is going to be less efficient and often times, simply wasted, when compared to private spending.

This truth is the fundamental failing of Socialism and Communism. An individual or company can quickly figure out society’s verdict on what they chose to invest. Did they make a profit or did they lose money? The government, on the other hand, does not have this feedback. Unless the waste is astoundingly obvious, the average citizen doesn’t complain enough to matter to politicians. Waste goes unnoticed.

Politicians, not constrained by the need to make profits, also tend to invest in projects that sound really nice, but are really a waste of money. The vast majority of Obama’s green initiatives sound really nice, but individuals don’t invest freely in them because the projects simply don’t pay for themselves. They are feel good money pits.

The third, and most sinister problem with this enormous government spending plan is the inescapable influence of lobbyists. If you ever hated the kind of privilege that connections in Washington held today, just imagine the feeding frenzy over a trillion dollars of chum falling into the spending pool. Spending will be shaped by the people who can spin the best story and pull the right strings.

Governments do not have the ability to calculate good investments, nor do they face the proper consequences of bad investments. It was only 19 years ago that the world cheered as the Berlin Wall fell and the world knew, in one instance, that Socialism was such a catastrophic failure, yet now our next President believes that a little bit of Socialism is what our economy needs.

If it weren’t bad enough that the basic assumptions of this plan were wrong, there are still more problems unforeseen by Obama’s short-sighted advisors. What happens a few years down the road to the companies and people dependent on these massive government contracts? As the willfully na├»ve Paul Krugman, a recent Nobel Prize winner in economics and the main proponent of Keynesianism in the world today, wrote so eloquently at his blog, “I don’t really know the answer”. Well, Mr. Krugman, I do know the answer. They will either lose their jobs, go out of business, or lobby the government to keep spending money to keep them afloat. Getting rid of this wasteful spending will be like pulling teeth.

The massive burden will one day have to be paid back. The “stimulus” will not help the economy, more likely hurt it. We will pile up massive debt, which means higher taxes in the future. We will be stuck with the politically difficult task of cutting people off the government dole. This policy is dangerous and ill-conceived.

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