Sunday, January 11, 2009

Government can’t really stimulate economy

Why not? Read here.
Any statement about the economy that contains a mechanical metaphor is more than likely wrong. We’re told government must “jump start” the economy. How can it? Think about what happens when a car is jump started. Cables connected to a charged battery convey juice to a dead battery. Energy is injected into the broken-down car from outside.

Politicians and court economists want us think this is analogous to government’s jump starting the economy. But it cannot be. Since the government has no money lying around waiting to be spent, it will have to borrow close to a trillion dollars to carry out the program President-elect Obama and the congressional leadership are planning.

But borrowing money for their pet projects injects nothing into the economy. It merely moves money from where it currently is in the economy to where politicians want it to be. How is that a stimulus?

Moreover, the debt will be covered (monetized) by the Federal Reserve by creating money out of thin air. That money will then be spent and “invested,” but notice the problem. Creating money is not the same as creating wealth. Imagine you were stranded on a desert island. Overhead you see a plane. It drops a large box down to you. Excitedly you tear open the box expecting to find food and water. But instead you find a printing press and a large supply of green paper. An instruction sheet states: “Print all the money you need.”

Are you better off?

All resources are scarce. A quantity of steel, for instance, can be used to make a washing machine or a machine to produce more steel. It can’t make both at the same time. When the Fed creates money, it increases the demand for scarce resources — but no new resources. How can that be a path to prosperity? Rather, it’s a path to higher prices and lower real incomes.

But it’s more than that. Since the new money gets into some hands rather than others first, monetary expansion — that is, inflation — changes the pattern of prices and production that would have resulted from voluntary exchange under sound money. Among the prices distorted are interest rates. By doing so, inflation transfers resources from those who produce wealth to others.

Inflation, therefore, is one more government income-distribution program. The lucky early recipients of the fresh fiat money gain purchasing power — command over scarce resources — at the expense of everyone else. The market process is thereby corrupted. In the absence of inflation (and other government interference), it is a system in which entrepreneurs pursue profit by pleasing consumers.

What makes this work amazingly well is the price system, which communicates to producers and consumers the relative scarcities of products and factors of production, the relative demands for such things, and the degree to which people prefer goods in the present to goods in the future. This permits production to be guided by consumers’ preferences.

Inflation distorts those relative prices, garbling the signals and ill-serving consumers. In the end society is poorer than it would have been. When the inflation is finally stopped, the economy suffers depression and mass unemployment as it corrects for the malinvestment. Or, if the inflation accelerates to hyperinflation, as it did in Germany in the 1920s and in Zimbabwe today, society will be thrown into chaos.

This is where the Obama-congressional “stimulus” plans will lead. Nothing is more dangerous than a politician who thinks he must “do something now”.
The last statement points at the root of the problem. People think of government as some creative force — government creates things (products, services, initiatives) and directs civilization. This is a model of a slave society, where people belong to the society, which itself is a big beehive.

On the other hand, a model of a free society, where each person is an individual who belongs to himself but agreed with others to build a society together, involves only one function of the government — not creative, but restrictive. Such a government merely protects people’s rights allowing them to make decisions in building civilization, providing services, inventing new products, etc. — something people have been doing just fine by themselves (and better than when government got involved).

In a free model of a government, the latter has no mitzvos aseh (“thou shalt”)it only has mitzvos loi ta’aseh (“thou shalt not”).

* * *

Last Shabbos, someone described to me the second, free model as “jungle”. That’s a popular imagery that socialists use (and this guy is mamosh socialist — he described Obama as too conservative for his taste). But in reality, we see that it is initiatives of private entrepreneurs that have made life conditions better for the society. It is a simple fact that when people engage in a free exchange of products and services, they benefit each other, improving each other’s quality of life — starting, first of all, from the bottom, from poor people.

All the governments were ever good at is waging wars, policing people, and rulling on lawsuits. That’s what the only function of a government should be — police, army, court. For a very simple reason — when people don’t have initiative to do something, they will never do it well. When your livelihood depends on doing a proper job, you will tend to do a better job. And if you don’t, customers will not pay you more money; they will choose a different service provider or product. As a result, you will stop being an entrepreneur, and people’s capital will shift to the guy capable of doing a better job.

If a plane falls down in the US, FAA gets more money. Can you imagine, if your cell phone company’s service was terrible, you got constant call drops, and yet, the next year, you would stay in the same company and pay it even more money instead of switching to a company providing a better and cheaper service? What would this do to cell phone business?

If capitalism and freedom produce jungle, why is that that people never leave a free country to immigrate to a socialist state? Simple people don’t care about politics or economic models. They simply go where life is better for them. Somehow, it always turns out to be the supposed “jungle”.

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