It has become increasingly clear that the presumed agent of fundamental change in the way Washington does business is firmly committed to the oldest tool in the Washington toolbox: the notion that government, using our money, can spend its way to widespread prosperity.
Leave aside the fact that the tax rebate of last spring alleviated the depth of the recession only marginally, that $350 billion spent on capitalizing financial institutions hasn’t normalized the credit market yet by a long shot, or that the Federal Reserve has more than doubled its balance sheet to over $1.2 trillion in an effort to bolster financial markets with few discernible results.
Forget for a moment that China, which has largely facilitated the U.S. government’s debt addiction by buying more than $1 trillion of that debt over the past several years, has been battered by the global downturn, needs to pay for a $600 billion domestic stimulus package of its own and is therefore less likely to buy U.S. debt in the near future. And put aside concerns that increased infrastructure spending, a key feature of the still-evolving Obama $800-billion further stimulus program, will provide little if any immediate stimulus.
There are more fundamental reasons to doubt whether throwing more money at a problem largely if not entirely caused by loose money and government incentives and mandates to overspend and overlend will yield the kind of recovery that Obama and most Americans would dearly love to see.
In his speech on the economy and his stimulus package last week — a speech still notably short on details — the president-elect declared that “only government can provide the short-term boost necessary to lift us from a recession this deep and severe.” The unspoken assumption behind such a statement is that government has a virtually inexhaustible supply of money that can be deployed without having deleterious side effects, only beneficial ones.
The problem, of course, is government has no money of its own, only the money it takes by force from the productive sector of society or it borrows and must pay back with taxes extracted from our children and grandchildren.
In the private marketplace economic transactions take place only if both (or all) parties believe they benefit. Such private, profit-making activity, as most of American history demonstrates, involves not simply the redistribution of existing wealth but creation of new wealth.
Increased government spending, however financed, takes money from the private wealth-generating sector of society and allocates it to projects not on the basis of their capacity to be economically self-sustaining, but on the basis of their political attractiveness. The hive of lobbyists seeking their piece of the stimulus pie, from private companies to state and municipal governments to federal government agencies, is evidence that much of the money will be allocated on the basis of political influence rather than economic sustainability.
In short, a government “stimulus” can only be accomplished by taking money away from genuinely economically productive activity. Pumping dollars that will eventually be worth less than they are today into various projects may provide some short-term relief or appearance of relief. But only the private sector can actually create wealth and thereby stimulate genuine economic growth.
This seems pretty elementary, but most people in Washington have powerful incentives to ignore elementary truths.