government spending

No, There’s No Near-Term ‘Sugar High’ From Government Spending

Members of the commentariat (credentialed and without) continue to promote the fiction that a lack of consumption slows economic growth. They’re confused. When we don’t spend we tend to store the unspent wealth with banks and other financial intermediaries. Rest assured that those who rent our wealth from us don’t just pay us for our excess ahead of warehousing it. Instead, they immediately lend what we rent to them to those with near-term consumptive desires; that, or they match it with entrepreneurs and businesses in need of growth capital.

The above truth eludes economists and pundits. Of the belief that unspent wealth sits idle, they cheer government’s extraction of the unspent wealth via taxes or borrowing. Governments never delay consumption which, if the deep-in-thought are to be believed, exists as a positive for the rest of us. Since politicians exist to spend, they’ll spend for us when we’ve chosen to save. If it all sounds more than a bit ridiculous, that’s because it is.

Henry Hazlitt once observed that “what’s harmful or disastrous for an individual must be equally harmful or disastrous to the collection of individuals who make up a nation.” Putting a positive spin on Hazlitt’s essential truth, savings surely redound to the individual, which means they by definition redound to the individuals who comprise what we call an “economy.” Pundits informed by economists disagree.

Take Washington Post columnist Fareed Zakaria. While he’s properly skeptical of industrial policy whereby politicians arrogate to themselves the power to plan economic activity, he oddly writes that “In the short term, government spending and tax incentives create a boom.” Such a view firstly implies that central planning, which was a murderous failure in the 20th century, has salutatory effects in the near term. No, it doesn’t. When politicians spend, they arrogate to themselves the right to direct resources in politicized, wasteful, and information bereft fashion, and in doing so, they substitute their non-knowledge for an information-pregnant marketplace relentlessly pushing resources to their highest use. There’s no near-term boom to speak of. Central planning that fails in the long-term doesn’t elevate itself in the near term.

But wait, Zakaria might say. He wasn’t quoted in full. Zakaria goes on to write after “boom” allegedly created by government spending and tax incentives, that “the private sector will naturally jump in, eager not to miss out on the action.” Perhaps that’s the boom Zakaria is referencing? If so, he’s still incorrect.

Not only does Zakaria presume a lot of dumb money in markets eager to follow even dumber politicians in politicized directions, the columnist ignores that there’s a seller for every buyer in the marketplace. Put another way, for every misguided private sector type who “will naturally jump in, eager to not miss out on the action,” there must be a sober, not-so-easily-gulled private sector player who won’t “naturally jump in” after politicized asset allocation, but who will sell at a premium to the misguided. Zakaria imagines a market of buyers only, which means he imagines that which doesn’t exist.

Furthermore, he misses the point. Implicit in his assertion that in the short term “government spending and tax incentives create a boom” is a puzzling corollary that a lack of government spending and lack of tax incentives born of tax simplification would foster a limp economic environment. No, not at all. Governments can only spend what they extract from us first, and they can only create tax incentives after taxing first.

Which means if governments aren’t spending or creating incentives, they’re controlling people less while consuming less of their production. That’s good for an individual, and logically good for the economy.

Republished from RealClearMarkets


  • John Tamny

    John Tamny is a popular speaker and author in the U.S. and around the world. His speech topics include "Government Barriers to Economic Growth," "Why Washington and Wall Street are Better Off Living Apart," and more.

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