PJ Media

'Economic Stimulus' Is Essentially a Fraud

In fourteenth-century Italy, alchemists came to be known as frauds because they deceived others into believing that they could create wealth in the form of gold from nothing, that is, base metals. In The Divine Comedy, Dante meted out especially excruciating punishment to these miscreants in hell. Capocchio, one such alchemist whom Dante consigned to hell, observed that he (Capocchio) had in life been “a good ape of nature.” In other words, he was damned for creating and representing fakes as real.

In twenty-first-century America, to be sure, we are far too sophisticated to be taken in by such hokum. However, as Kipling so incisively observed many years ago:

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wabbling back to the Fire.

So it is that not only did many Americans up until recently believe that housing prices would ever increase, they — or at least a large number of sophisticated investors — also believed that Bernie Madoff had solved the challenge of how to produce consistently above-average investment results with minimum risk. Such was their trust, they invested their hard-earned wealth in such nostrums.

We now find ourselves informed by “leading” economists and politicians that the solution to our current economic malaise is for government to embark on a gigantic spending spree. This spending, we are assured by one of the leading securities rating organizations, Moody’s Economy — whose recent history of ratings brings into question its judgment for quality analysis — that these expenditures will generate “multiples” of growth in GDP in magnitudes exceeding 1.5 times the amount spent. These estimates are supported by complex macroeconomic models which are incomprehensible to all but the most elite cognoscenti. In other words, the “experts” say the answer to economic stability and wealth creation is for our government to spend borrowed funds, to be repaid from our future wealth. Thus, miraculously, we are led to believe, our wealth will multiply and economic growth will be miraculously restored.

On the one hand, then, we are informed that we are in our financial straits as a result of a “bubble” caused by excessive spending which caused housing prices to grow beyond any sustainable level. On the other hand, we are advised that the way to solve this economic problem is to indulge in a massive spending program.

Is this not but a contemporary form of alchemy or fraud as understood in Dante’s time? I suggest that the alchemists have returned in the guise of economists and big-government propagandists and that it is time to reassert a few easily understood — and vital — economic principles.

The first of these is that since government has no wealth of its own, the only things it can do are:

  • to redistribute private wealth (tax and spend), and/or
  • to create new money (not wealth) with the resultant diminution of value in all of its citizens’ wealth.

Lest we forget, capital formation is the seed corn of wealth and job creation, and since wealth creation is the driver of economic progress, one must ask if government spending increases or enhances capital formation. If it does, does it do so more efficiently and produce more wealth and jobs than investment or spending decisions made by individuals, in the anticipation that their decisions will enhance their own economic well-being, i.e., create more personal wealth?

The answer is “no,” which is not to say that government spending or “investment” can have no beneficial effect. Yet the question remains whether the benefits of such spending are superior to those that would have accrued if individual citizens had been able to make their own decisions regarding economic matters. Viewed from the perspective at this time of, for example, General Motors, one could argue that although government loans may be beneficial to the recipient, they obscure the benefits that would have accrued had that same amount been saved or invested by individuals.

Moreover, government involvement in the economic affairs of a free market will also have a significant negative effect since market prices, which are the normal market indicators for allocation of resources, are distorted by this artificial and temporary spending and will thus encourage less efficient or even bad investments.

The history of economic progress throughout the world provides irrefutable evidence that the economic well-being of ordinary citizens is closely correlated to the relative degree of freedom in markets and the relative lack of government planning and spending. To argue that government direction and allocation of resources will produce better results is to ignore history and the general understanding of how markets function.

Let us put aside why politicians and various intellectuals prefer to have government allocate these resources and otherwise try to direct our lives in intrusive ways. It should be obvious to all that, from an economic standpoint, the cost of government intervention in the marketplace always comes at too high a price.

Is it too much to hope, at this time, to prove Kipling wrong and stop this ill-advised and headlong rush into massive government spending programs before our “Fool’s bandaged finger goes wabbling back to the Fire”?