Defenestrating Thoughts from the Bivouac

We hear “the government has to do something quickly” about the economy quite often these days, because “we can’t do nothing”.

But, no one is stopping to ask an very important question: “Why?”

Yesterday we already tackled the “quickly” falsehood: even though we’re told that quick action is needed, only 20% of the spending in Obama’s stimulus bill is for 2009. The remaining 80% is in 2010 or later.

Now let’s talk about the “government has to do something” part. We’re told that the government has to spend in order to create jobs. But this wrong for a number of reasons, including:

1. The government cannot create money, it can just forcibly redistribute it
2. Private sector spending is more efficient than public sector spending
3. Government interference is prolonging the pain by keeping private money on the sidelines which delays the recovery

The government cannot create money, it can just forcibly redistribute it

The government cannot create money out of nothing. It can either take the money from its citizens via taxes, or print money causing inflation which reduces the spending power of its citizens by an amount exactly equal to the amount printed.

Either way, the government is taking money from its citizens; the difference is whether it is done directly (taxes) or indirectly (inflation). The net result is the same: the government cannot create money nor can it increase aggregate spending. All it can do is redistribute money.

Or in other words, if the government gives one person money, that person may be “stimulated”. But it’s at the expense of another person: the person that paid the taxes. The taxpayer is now unstimulated. The net aggregate effect is zero.

Private sector spending is more efficient than public sector spending

If we want to have spending that creates jobs, it’s better to have that spending coming from the private sector.

But, lots of people will tell you, “the private sector doesn’t have any money”. This is categorically untrue for two reasons.

First, if the private sector had no money, then the government has no money. The only reason government can spend trillions on “stimulus”, because it took it from the private sector in the front place.

Second, the bubble in the bond market indicates that there is tons of money in the private sector.

The reason spending needs to come from the private sector is because government spending is most likely to be a malinvestment.

For one, private spending is generally more efficient than the government spending because people act more carefully when they spend their own money than when they spend other people’s money. A great example of this is the current bailout: there is no oversight on where the money went, the entire plan is built on assumptions they have “considerable uncertainty” about, and a significant amount of money is going to Wall Street executives as bonuses!

Furthermore, government bailouts take money from the productive and give it to the unproductive. A great example of this is the Big 3 automakers. No one would invest their own money in those companies, so the government takes people’s money and gives it to these failing automakers.

Remember how if you give money to stimulate one person, you just unstimulated the person you took money from? The same applies to government job creation. Let’s say that the government takes $50,000 in taxes and creates one pothole filler job. The pothole filler is a very visible effect. But what we don’t see is the job that would have been formed if the $50,000 was spent in the private sector.

Since you can’t see the job that wasn’t created, the negative consequence of the government action is invisible and thus forgotten. Plus when you factor in that government spending is inefficient due to bureaucracy, the invisible consequence is even greater. Obama’s original stimulus plan needed $250,000 to “create” a single job! The private sector could produce many more jobs for $250,000.

Government interference is prolonging the pain by keeping private money on the sidelines which prevents the recovery

At the root of it, the government interference is delaying a recovery. There is plenty of money out there, but it’s waiting on the sidelines until assets are priced properly.

The government’s is taxing the prudent and propping up failed institutions. That’s survival of the weakest, which is not what we need.

We need to clear up the bad debt and liabilities in the system. That means we need to allow the liquidation of debt to occur. The prudent will buy up assets with value and build a new foundation for new businesses to replace the failed ones. When the government props up bad companies, it prevents new healthy businesses from forming.

This does mean there will be a lot of pain in the short term. But there’s no way prevent the pain, we’re already in a big mess. We can either take the pain now and rebuild, or we can delay the inevitable and make it worse.

Lots of people have been saying, “but no one wants to buy some of these assets”. Well, if no one wants to buy them that’s a very strong signal: there’s no value in the asset.

Lastly, let’s consider the idea that lots of government spending will fix our problems. The past 8 years under Bush we’ve seen record spending, and where are we now? If massive spending and pork-laden handouts under Bush got us in this mess, how is massive spending and pork-laden handouts under Obama going to be any different?

So what should we do?

It’s rather simple. The government needs to balance the budget immediately; debt got us into this mess, we need to get out of debt to get out of the mess. Ending our current wars and bringing all our troops home will go a long way in balancing the budget. Plus, why do we have 40,000 troops in Germany anyway?

We could also use some across the board tax cuts. The tax cuts will return money to American families who can spent it on things they need, as opposed to it being used as bonuses for Wall St executives.