If you listen to the Beltway crowd, the country is about to enjoy rising prosperity, thanks to all the federal “stimulus” spending. Biden is about to shower the nation in $1.9 trillion in new federal outlays and there will probably be more to come. Aggregate demand, to employ the Keynesian lingo, will rise, and that means that production and employment will rise. Happy days are here again!
Writing at RealClearMarkets, John Tamny shows the error of such thinking. He does so with the assistance of some well-known children’s books — The Berenstain Bears. The young bears want money from the tooth fairy, but understand that it’s actually things that they want, not money. Somebody will have to first produce those things.
Tamny writes, “There’s quite a bit of economic learning that can be had from this simple story. It’s learning that seemingly never reached all manner of economists, politicians, and the journalistic enablers of each.” One of those journalistic enablers is Neil Irwin of the New York Times. Tamny quotes him as saying the new federal spending will be good because “people like having money.”
Of course, people like having money, but money itself is useless without people first producing things to buy. Tamny continues, “What’s really awful about government spending is that it shrinks the dollar holdings of those most capable of saving (the stimulated) and shifts them to those most capable of consuming (the depressed). To the typical economist, this scenario is grand since economists believe consumption drives economic growth. No, investment is the source of growth, and government spending logically shrinks the very investment that drives down the cost of most everything.”
The point that Tamny is getting across is that, as Say’s Law informs us, purchasing power grows out of production. Dropping trillions of dollars into the economy won’t cause those who produce goods and services to do more and may very well get in their way as the resources they need are lured away by expanding government.
He concludes, “Not only do (government spending plans) not stimulate economic growth, they logically slow the process whereby goods and services are rendered more and more affordable. In short, the wealth redistribution that doesn’t stimulate also doesn’t help those it’s billed to help.”
Correct, but the plans of leftist politicians depend on most of the people believing childish notions.