Government spending is an effect of growth, never an instigator, so taxing and borrowing to stimulate the economy has the opposite effect. (Commentary)
If you’re producing you’re demanding. Repeat the previous truth over and over again. If you’re producing you’re demanding even if you’re the picture definition of ascetic. By not spending the fruits of your production you’re not shrinking demand by saving, rather your savings merely shift the consumptive fruits of your production to someone else.
Of course, it’s possible – and very likely – that the productive ascetics won’t get to save all the rewards of their enterprise thanks to government. The latter has no resources, but does have taxable access to the fruits of productive behavior, and this arrogation of the work of others allows government to tax and borrow against productive behavior.
What’s crucial about all of the above is that when government spends after taxing and borrowing, it is not introducing any new demand. Only production can introduce demand. Government isn’t some other.
Despite these inviolable truths, economists and those who play economists on TV and in print continue to pretend that government, presumably for being government, has some kind of magical power to stimulate the economy. Take Manhattan Institute adjunct fellow Stephen Miran. In a recent opinion piece about the U.S. economy, Miran observed that “A deficit more than 7% of GDP (Gross Domestic Product) can lift growth, but outside war or severe recession, it is irresponsible fiscal management.” So much that’s so incorrect in so few words…
Miran’s musings imply that government is in fact some kind of other. It’s not. Government is an effect of economic growth in much the same way that consumption is an effect of growth. Repeating again what requires endless repeating, consumption is what follows production. Applied to government, it only has spending power insofar as it once again has taxable access to production. Applied to Miran’s analysis, neither government spending nor deficits can boost growth as he imagines simply because growth is what enables the spending and deficits in the first place. For Miran to presume that “A deficit more than 7% of GDP can lift growth” is for Miran to double count. Don’t worry, it gets worse.
Miran’s view is that only instances like “severe recession” rate lots of borrowing. He gets it backwards. That is so simply because governments don’t create economic growth as Miran was taught, rather they take from it. All production and the wealth that springs from production comes from the private sector, at which point the only rational response to a severe recession would be for government to greatly shrink its economically burdensome spending footprint so that actual producers in the real economy can be matched with precious resources. In other words, government spending is a tax on growth. Always.
Not to Miran. He writes as though government must spend for us during periods of “severe recession” in order to lift the economy. By Miran’s logic, all rules against thievery should be suspended during economic downturns.
Miran’s broad argument is that the prosperity of the moment will be short-lived as the effects of central planning wear off. No, the economy booms despite the government’s long fingers, fingers that Miran somehow believes are stimulative. Miran kind of sort of fears “irresponsible fiscal management,” when in fact nearly all government spending is irresponsible (and a wet blanket on growth) precisely because it’s the consequence of politicians substituting themselves for the markets in the allocation of precious resources.
Alas, all of this is lost on the former Trump Treasury official. Miran believes “fiscal policy” and “the monetary side” are growth instigators. Sorry, but the economy isn’t some kind of machine that bureaucrats can tweak on the way to prosperity. In truth, central planning failed in murderous fashion in the 20th century. Contra Miran, it won’t revive its reputation in the 21st.
John Tamny is editor of RealClearMarkets, President of the Parkview Institute, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His latest book is The Money Confusion: How Illiteracy About Currencies and Inflation Sets the Stage For the Crypto Revolution.
Originally published by RealClearMarkets. Republished with permission.
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