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Beware Dr. Galbraith's Snake Oil

As the Greek welfare state collapses, citizens there have been rioting over cutbacks in social spending necessitated by mounting government debt. The rioters apparently fail to recognize that whenever a government routinely promises to spend more money than it has, then eventually it will be unable to fulfill those promises. Many Americans worry that we will soon be facing similar troubles at either the state (e.g., California) or national levels.

Yet some renowned economists, such as Professor James Galbraith of the University of Texas, are trying to convince us that the U.S. government should ignore our massive federal budget deficit and instead spend even more. Galbraith argues that calls for fiscal responsibility are “misguided” and that greater deficit spending will create greater prosperity.

Galbraith’s proposals are dangerous because they are based on the notion that you can get something for nothing. Unless we want to see a Greek-style collapse here in America, we must reject those ideas as economic “snake oil” and instead demand an end to our government’s fiscally irresponsible deficit spending.

James Galbraith is no street corner crank. Instead, he has a BA from Harvard and a Ph.D. from Yale, both in economics. He is a professor of economics at the University of Texas, Austin, and son of famous Keynesian economist John Kenneth Galbraith. Because of his impressive academic and intellectual pedigree, many Washington politicians and pundits take his ideas seriously. Hence, so must we.

In his recent article in The Nation, “In Defense of Deficits,” Galbraith argues the following points:

  1. The political push to reduce government deficits is economically misguided, based on an irrational “phobia” of deficits.
  2. If we want economic growth, we need more spending. Only banks and governments can stimulate spending because (in his words): “Governments and banks are the two entities with the power to create something from nothing.”
  3. We shouldn’t worry about the alleged impending bankruptcy of Social Security or Medicare — or of the U.S. government itself. Why? Because the government is the source of money and therefore can’t run out.
  4. Government debt is not really a “burden on future generations,” because it never has to be repaid. Each generation can just pass that debt onto the next generation, so there’s no problem.

Similarly, in his May 12, 2010, Washington Post interview with Ezra Klein, Galbraith repeats the mantra that the federal deficit poses “zero” danger to our country. Why? Because the government can’t ever run out of money, “just as a bowling alley does not run out of points.”

Most Americans know that these ideas are deeply wrong. They recognize that borrowing doesn’t produce new wealth, that government can’t create something from nothing, and that the ultimate source of wealth is not entries in a government ledger book, but real goods and services created by real people.

So why are such obvious fallacies so widespread in academia and government? As writer Ayn Rand once advised, “Don’t bother to examine a folly — ask yourself what it accomplishes.”

Galbraith himself answers that question in his article in The Nation.

Specifically, he makes his arguments about deficit spending to defend the Ponzi scheme nature of government entitlement programs such as Medicare and Social Security. He wants us to believe that popular fears of their pending insolvency are unwarranted because they are merely “transfer programs” that “move resources around within our society at a given time” in a “fair, progressive, and sustainable” fashion.

But as Margaret Thatcher once observed, the trouble with socialism is that eventually you “run out of other people’s money.” Entitlement programs like Medicare and Social Security can stay afloat only as long as enough Americans are willing to keep paying for them. If men like Galbraith can convince taxpayers that these entitlement programs don’t really cost anyone anything, then we’ll gladly keep handing over our wallets to the government.

That also explains why Galbraith repeatedly attempts to undermine our independent rational judgment on this issue. He characterizes Americans’ concern over deficits as a mere “phobia.” Any talk of the impending bankruptcy of Social Security and Medicare is just a “campaign of misinformation.” Our common-sense view that it’s impossible to live beyond one’s means is just unreliable “homely wisdom” that doesn’t apply to the special world of government spending.

Galbraith’s consistent theme is his demand that we suspend our reason and instead defer to his alleged economics expertise. Our voluntary suspension of reason is precisely what men like Galbraith need for their schemes to work. In essence, they are saying, “Don’t worry if our plan doesn’t make sense. Let us do your thinking for you — and we promise that you’ll magically get something for nothing!”

Suppose a traveling salesman came to your neighborhood peddling a miraculous snake oil remedy that would cure your baldness, help you painlessly lose 20 pounds, and make you irresistible to women. Plus adding a teaspoon to your automobile gasoline tank would double your gas mileage and pay for itself in just a few weeks. Most of us wouldn’t give him the time of day, let alone our wallets. The only way the salesman can get us to surrender our wallets is by first getting us to surrender our reason.

Similarly, we shouldn’t fall for the sales pitch of economic snake oil peddlers claiming that massive deficit spending will magically create wealth, reduce unemployment, and guarantee “universal health care” for the elderly — without costing anyone anything. The only way the Galbraiths of the world can get us to surrender our wallets is by first getting us to surrender our reason.

Reining in runaway government spending won’t be easy. It will require politically difficult discussions about reducing the size and scope of government to its proper limits. It will require gradually phasing out unsustainable entitlement programs like Medicare and Society Security in a controlled fashion before they crash in an uncontrolled fashion. And above all, it will require embracing fundamental economic truths, including the basic fact that wealth is something created by the thought and labor of people — and that there’s no such thing as a free lunch.

An important first step will have to be rejecting the economic snake oil salesmen who tell us that governments can create something from nothing. Otherwise, it won’t be long before we see deadly Greek-style riots on the streets of New York, Chicago, and Los Angeles.