When the financial crisis hit the U.S. in late 2008, individuals realized that their savings—especially their stocks and their homes—were not as valuable as these individuals had thought. These individuals then acted rationally: they cut back on spending. They refrained from buying things that they did not need: things such as vacation trips, dinners in restaurants, home entertainment centers, and new automobiles. They cut back on these luxuries in order to rebuild their savings for things more important to them: things such as private education for their children, or a nest egg for retirement, when they would need savings for food, shelter, clothing, and health care.
Businesses that offered the unneeded goods and services suffered. The government’s stimulus plan was designed to spend government money—acquired through borrowing on behalf of taxpayers—to help these suffering businesses as well as suffering state and local governments and non-working individuals; the goal was to enable employees of these businesses and governments to keep their jobs and continue spending, and to enable non-working individuals to continue spending too. And the employees’ jobs consisted of continuing to produce things that rational individuals had decided they did not need, and that non-productive individuals had not earned.
Most savers implicitly assume that their government bonds and stocks (in corporations whose assets include government bonds) represent ownership of real capital: things such as equipment, materials, and professional expertise. They assume that this capital can be used or sold in the future to make or buy the food and health care they will need. But in fact, government bonds are backed by nothing but future tax claims on the savers’ own savings and future labor. In stimulus spending, the government buys and uses up real capital from savers and pays for that capital with more promises to tax the savers later.
And so, while many individuals think they are replenishing their saved capital by cutting back on luxuries, the government is surreptitiously spending this very capital in order to continue the production of what the savers do not need. During 2009, according to the Federal Reserve, the U.S. private sector saved roughly $0.88 trillion. But in the same year, the Federal deficit was $1.41 trillion, not even counting large increases in unfunded liabilities. Despite the best efforts of the savers, more of their real capital—and hence more of their productive capacity—is being eroded by stealthy government.
One day, there will not be enough real capital remaining, and factories and hospitals and mechanized farms will no longer be able to run, and prosperity will end.
If the government were to eliminate its stimulus spending, the economy would immediately transition from the production of unneeded or unearned things to the production of needed and earned things. Signs of transition might not appear in economic statistics immediately, because the first steps of transition do not occur on the floors of factories or marketplaces. They occur inside the minds of producers. When laborers and manufacturers stop spending time on making unneeded home theatres, they can use that time to learn to be doctors’ assistants or to plan to produce medical supplies. When an investor is no longer offered ‘safe’ Treasury bonds used to keep an auto company going, he is motivated to seek new projects for his money, and entrepreneurs are motivated to conceive them.
A favorite argument for stimulus spending is an argument from the Keynesian tradition. In an economic recession, according to this tradition, there are idle resources; factories are operating at under full capacity, and people are unemployed. According to Keynesians, if the government can somehow coax the economy to put these idle people and machines to work, then extra wealth will be created at no cost. According to this argument, such government spending does not ‘crowd out’ private investment; the resources paid for by government spending are not being taken away from some private use, because these resources had been idle anyway.
The basic error of this argument is the basic error of Marxism: the denial of thought. Marx was a (‘dialectical’) materialist. To Marx, the means of production are machines, arms, and legs, but not minds; working entails sitting or standing at a machine and pulling levers, or swinging hammers. To materialists such as Marx and (implicitly) Keynes, each individual’s thinking—about what that individual needs, what he should produce, and what new machines he might build to produce these things—does not count as work.
In a free society, free individuals may choose to let their obsolete machines idle, but their minds do not idle. A laid-off laborer lives off his savings, which he did not squander on non-necessities, while he teaches himself a new skill. A businessman who made now-unneeded automobiles starts planning to make ambulances. An individual who used to spend his free time choosing fancy new furniture and clothes to buy now spends that time choosing research and development projects to invest in. And so on. But individuals cannot do this new teaching, planning and investing during the time that they are still doing the obsolete ‘working’ and frivolous spending.
The irony of Keynesianism is that, in the act of trying to achieve ‘full employment’ and ‘full capacity utilization’ of existing machines, it achieves the idling of the one truly precious resource: the human mind.
Through bail-outs and other stimulus spending, the government ‘saved’ the jobs of many people. The government also ‘saved’ these people, many of whom had not saved adequately for themselves, from even having to think of ways to cut back on expenses. Had they lost their jobs, not only might they have had to cut out SUVs and cell phones and beer and theatre tickets, but they might have had to move in with their parents or their neighbors, and live two or three families in a one-family house. The former highly-paid banker might have had to do his same old job for one tenth his old pay after his bankrupt employer was taken over by new owners. The former auto worker might have had to become a handyman hustling jobs from the whole neighborhood, working 80 hours a week instead of his usual 40, while studying another 10 hours a week to be a paramedic, and thinking another 10 hours a week about a new idea for low-cost mobile offices for doctors. The children might have had to do all the household chores while their mother worked 80 hours a week helping out in the emergency room and learning to become a nurse. And all of these things would have been good, because these people would have flourished by their own productiveness, and the rest of us would have been freed from the limitless burden of being our brother’s keeper.
But by ‘saving’ the jobs of these workers, the government ‘saved’ these individuals from the responsibility—and the rewards—of thinking.
It is difficult to say who are the most harmed by the government’s ‘jobs stimulus’: those of us who are forced to pay for these obsolete jobs, or those who remain in them.
A job saved or created by government is a job that should not exist.
Government spending enables some people to acquire what they have not earned, deceives other people into thinking they can afford to buy what they don’t really need, and stimulates people to work at making things that people have not earned or don’t need.
A society recovers from government spending when all individuals are free to produce, invest, and consume their own property according to their own thinking.
An earlier version of this article was published on Ron Pisaturo’s Blog.