This week’s “Daily Journal” guest columnist is Dr. Roy Cordato, Vice President for Research and Resident Scholar at the John Locke Foundation.
The economy is in the middle of a recession, and all discussion in and out of Washington centers round the word “stimulus.” Unfortunately, President Obama’s nearly trillion-dollar spending package, like George Bush’s efforts last fall, has no chance of enhancing economic growth. Apparently, President Obama will be giving us sameness we can count on. His plans to continue the Bush legacy of massive increases in government spending and debt will, in all likelihood, prolong the recession.
Many pundits claim that we cannot judge the potential effectiveness of Obama’s plan until the specifics are made clear. But, in fact, the problem is not with the details but with the idea that government can spend an economy out of recession. Every dollar that the government funnels into the ailing economy ultimately has to be diverted from other activities in that same economy.
Consequently, what we will inevitably get is not stimulus but a massive transfer of wealth from those who created it, i.e., businesses, entrepreneurs, and workers, to those favored by the political process. President Obama’s stimulus package can be viewed as a follow-through on his desire, expressed to Joe the Plumber during the campaign, to spread the wealth.
If revenues for Obama’s plan are raised through higher taxes, which seems unlikely, businesses and income earners across the country will be made poorer in a very direct way, with less to invest and spend. And when and if the government creates jobs by subsidizing wind turbines or solar panels, or funneling billions of dollars to ailing state governments, the people who are taxed to pay for it all will be made worse off.
As the wealth-creating sector of the economy suffers under the burden of higher taxes, the disfavored industries may be forced to lay off workers or even close their doors. Consumers whose incomes depend on those industries will be forced to spend less, harming all those who would have been beneficiaries of that spending. Instead of economic stimulus, we get a wealth transfer from private entrepreneurs motivated by real human preferences and resource scarcities to those who are favored by the whims of congressional vote trading and special-interest pressures.
The more likely source of the revenues will be debt — many are suggesting that the treasury will be borrowing more than $1 trillion dollars this year. In this case, new government borrowing will draw valuable resources out of private capital markets and away from investments that would have been made by private entrepreneurs. Again, investors, workers, and consumers throughout the economy have less, and the politically correct and well-connected have more.
Furthermore, this displacement of private sector control over resources occurs even if all of the money is borrowed from foreigners, which some are arguing is likely to be the case. This is because when government spends money, regardless of where it comes from, it automatically diverts resources away from private sector usage. The spending bids up resource prices, increasing the cost of real private investment and entrepreneurship. This highlights the fact that the real problem is with the increased government spending and not with how the revenues are raised or who provides them.
Finally, what if the government uses the Federal Reserve and simply creates the money out of thin air? This might have the most devious effects because it imposes a hidden tax. Money creation does not add new resources or wealth to the economy; it reduces the value of the money already in circulation, making existing incomes and money holdings worth less. The devaluation of money is reflected in prices that are higher than they otherwise would be, i.e., inflation.
But spending financed with new money, like spending financed with taxation or debt, also creates a wealth transfer, favoring the political winners. These are the people who get the new money first. Inflation occurs as new money works its way through an economy from its points of entry. When new money first enters the economy those who receive it get to spend the money before prices go up. It is their spending of the new money and the spending of those who come after them that cause prices to rise.
For example, if the president decides to “stimulate” the economy by investing in so-called green energy, those companies participating in the generation of that energy will be the first to receive the new money. Wealth and economic resources will be transferred from those who get the money last. In the process, the cost of production will be driven up for those who receive the new money later or possibly not at all. Not only businesses are harmed. This process is particularly devastating to the poor and the elderly, who are more likely to be on fixed incomes.
There is a reason why all this is appealing to politicians. Those who are employed as a result of the largesse, i.e., the political winners, are obvious and seen by all. News cameras can show up at the site of the government-funded project and talk about people being put back to work. Politicians can claim credit for these jobs at election time.
But those who pay the price are not so easily identified. They are the people who lose their jobs because their industries have to cut back. Or it may be those who are finding it impossible to get a job because private-sector investors are being squeezed out of the market by government-financed demand for scarce resources. These costs are real, but those who bear them cannot trace their plight easily to the government policies. Politicians will reassure them that they will benefit from the next round of spending, as we are now seeing. The victims shoulder the burden while presidents and members of Congress take false credit.
There are pro-growth policies Congress and President Obama could, but are unlikely to, pursue. These policies would mean breaking almost every promise that the Democrats made during last year’s campaign. But they are policies that would represent real change.
Instead of pre-empting private-sector economic activity with a trillion dollars of new spending, the president and Congress should seek to return that amount to the citizens through budget, tax, and deficit reductions. Furthermore, the tax cuts should be focused on reducing the cost of entrepreneurship, saving, and investment, i.e., cuts in marginal tax rates, capital gains, and corporate income taxes.
There should also, at the very least, be a moratorium on all new regulatory programs. A cap-and-trade scheme to fight global warming should be off the table. In fact, this should be the case regardless of the economy given the inconvenient truth that there has been a decade of no new warming.
In other words, President Obama, Harry Reid, and Nancy Pelosi should do all they can to get government out of the way and let the free interaction of entrepreneurs and consumers undo the mess that Congress, the Bush Administration, and the Federal Reserve Board, have created — but don’t hold your breath.