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From stimulus to socialism

"Economic history is a long record of government policies that failed because they were designed with a bold disregard for the laws of economics," said Ludwig von Mises. Echoing the primitive pre-classical attempts at market analysis of mercantilists (John Law) and physiocrats (François Quesnay), Keynesians fear that any dollar not spent immediately by the consumer leaks money away from the economic cycle.

The doomsday scenario goes like this: Someone's thriftiness has a ripple effect of decreased spending by other participants. It results in lower production and employment figures. A recession decreases household incomes and total savings. A vicious cycle ultimately makes the whole pie smaller.

To offset the damage caused by this "paradox of thrift," a resurrected crackpot theory advocates a spendthrift government priming the pump. After all, who is better qualified to act as a giant voracious consumer with unlimited credit and a scheme to pay back with IOUs? Government expenditures are expected to increase aggregate demand---creating jobs, putting money in the pockets of workers and entrepreneurs, boosting consumer and investor confidence.

There is just one tiny flaw with this fiscal multiplier theory: It does not work. Growth begins with thrift, with curbing carnal desires for immediate gratification and transformation of savings into human and physical capital. My children will enjoy higher living standards only if this generation works harder, saves more, and invests better. Government spending is unlikely to promote any of these activities.

Consumption is a function of production---to believe the opposite puts the cart in front of the horse. Aside from protecting private property rights, most government interference in the markets is not productive but redistributive (Social Security, Medicare) and obstructive (minimum wages, antitrust legislation). This means that Uncle Sam's spending is not genuine demand.

Sooner or later someone has to pay the bill. And it will be paid, as usual, by taxing those who work and invest, or by something much more devious and disruptive---inflation. While the former paves the way for a future recession and may cost someone a re-election, the latter is much more than an economic evil. It is immoral as it takes money away from those who have prudently saved for their children. It also violates the Constitution---taxation without representation. Thus one thing becomes obvious: The government expansion is nothing but expropriation of private wealth, i.e., socialism.

(For those more easily persuaded by empirical studies than a "Gedankenspiel" analysis, read Friedman and Mieselman's The Relative Stability of Monetary Velocity and the Investment Multiplier in the United States, and review the data behind the Barro/Wall Street Journal vs. Krugman/New York Times debate.)

Alex Tokarev Alex is a former WORLD contributor.


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