By John Tamny for RealClearMarkets
Government spending is a tax. Let’s get what’s obvious out of the way. And this isn’t a comment about deficits versus surpluses. A focus on either is the stuff of simple minds. It implies that it somehow matters how government gets the money that it will almost certainly waste. It really doesn’t.
What matters is total dollars spent. It’s a signal of how much control people like Nancy Pelosi and Kevin McCarthy have over the economy.
The horrors of government spending aren’t just the seen whereby the Pelosis and McCarthys of the world substitute themselves for actual investors. Consider the unseen; as in how many Microsoft, Amazon, and Grail (look it up) equivalents never achieved lift-off over the years because politicians were such size consumers of precious resources.
Government spending is a cruel barrier to better living standards, enhanced health, wellness, and opportunity.
At the same time, it should be stressed that government spending doesn’t cause inflation. To believe it does is to not just misunderstand inflation, it’s also to embrace what vandalizes common sense: the “Keynesian multiplier.”
John Maynard Keynes referred to his many disciples as “fools” to Friedrich Hayek toward the end of his life, and the very notion of a government spending multiplier supports Keynes’s disdain. His disciples believe that government spending has a multiplying effect on economic growth. If government hands out $1 trillion, the net effect is greater than $1 trillion. I know, completely ridiculous.
Logic dictates that the negative economic impact of the spending will actually exceed $1 trillion simply because economic growth is driven by investment, and the redistribution of wealth logically reduces investment by $1 trillion now; thus erasing progress potentially much greater than $1 trillion progress down the line. Again, consider the unseen of wealth not saved and not invested. Oh well, that’s kind of the point of it. To Keynesians.
They desire redistribution of unspent wealth so that it will be spent. Except that the individuals who comprise the economy are once again reliant on savings. The Keynesian view of growth gets things more than backwards.
To which Keynesians will say that the spending does boost demand. No, it doesn’t. Such a view implies that absent government redistributing wealth, what’s unspent will sit idle under a mattress. Not at all. Banks and financial institutions don’t warehouse money. They pay interest on deposits so that they can earn more money loaning it to and investing it in individuals and companies in need of funds right now. No act of saving ever subtracts from demand. Logically.
Ok, so where does the demand come from? It should be obvious that it emerges from production. To demand we must supply first. To believe otherwise is to believe that Mississippi’s citizenry is much poorer than that of Texas because government isn’t spending enough. More realistically, Mississippians are poorer and buy fewer things because on average they’re quite a bit less productive than Texans are.
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The simple truth is that all demand begins with supply. This is true even for those who spend despite not working. Lots of kids don’t work, but as evidenced by the existence of all manner of television channels catering to their needs, kids are big spenders. Yes, their parents shift the fruits of their production to them.
In West Virginia, 29 percent of all personal income is a consequence of federal largesse. In other words, roughly 29 percent of “demand” in West Virginia results from production outside the Mountain State. Occasionally members of the Left have happened upon this truth to critique the political lean of West Virginians. They pride themselves on their limited government beliefs only to live to a high degree off of government.
The main thing is that the consumerism of kids, West Virginians, and Washington, D.C. residents (let’s call it a government town….) isn’t a consequence of some kind of “other.” All three can spend in substantial amounts relative to the rest of the world simply because they have access to the fruits of the production of some of the world’s most productive people. All demand begins with supply. Repeat it over and over again.
And remember it as economists and pundits of the dominant ideologies drool about inflation born of “excess demand.” In a Wall Street Journal opinion piece the other day, Keynesian economist Jason Furman pointed to “excess demand” from government spending as a driver of inflation. That Furman believes what is nonsensical is hardly a story, however. Of course he believes what’s ridiculous.
Where it becomes disappointing is that in their desire to politicize inflation, conservatives are increasingly embracing the same multiplier. Phil Gramm is a regular op-ed writer for the Journal, and his opinion pieces have claimed the same about “excess demand.” So have unsigned editorials at the paper. Except that there’s no such thing as excess demand.
Demand is what follows supply, which means government spending is what happens after the productive are relieved of some or a lot of the fruits of their production.
As opposed to fostering “excess demand,” governments are able to spend and hand out precious wealth only insofar as others have less to save, invest, and spend. There’s no free lunch, though you wouldn’t know it from reading most economic opinion these days. Paraphrasing President Nixon way back when, “They’re All Keynesians Now!” Funny, I remember when supply siders mocked falsehoods like mutlipliers and demand without supply first.
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Furthermore, even if governments could engineer “excess demand” (they can’t), this wouldn’t be inflation. Inflation is a departure from a currency standard. It’s a devaluation of the currency. Too bad Democrats are too clueless to know what actual inflation is, and too bad conservatives are too political. Inflation is a serious thing, but serious about matters economic is in short supply now.
Syndicated with permission from Real Clear Wire.
John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His most recent book is When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason.
The opinions expressed by contributors and/or content partners are their own and do not necessarily reflect the views of The Political Insider.