Tuesday, 20 January 2009



Sometimes even a flawed argument contains a kernel of truth – and when I say that, I don’t mean the destructive idea of government “stimulus” so beautifully pilloried above.  As Bernard Hickey said in the Herald,

Governments around the world are gearing up to borrow and spend unprecedented amounts on infrastructure, tax cuts and social spending in Keynesian-style attempts to boost their flagging economies. But the question rarely asked so far is: who is going to pay for it all?

The answer, of course, is us.  You and me. The money borrowed now to pay for the world’s stimulus packages will be lent by savers, or printed by central bankers, but it will eventually be paid back by us -– by taxpayers – and it will be spent by governments at the expense of real productive spending.  (And at roughly 3% of GDP, NZ’s stimulus package puts us third most profligate in the world’s “stimulus” stakes, right behind Iceland and Denmark.)

This is a bill doesn’t just have to be paid later; we have to pay for it now.  As Ludwig von Mises used to say, it’s the current generation that has to pay for huge deficits.  The reason is that there’s only so many pre-existing resources that all that stimulus can flush out, and in the absence of the government’s stimulus their owners had other plans for them.  To set them to work at the government’s behest means those resources are bid away from those other more productive uses.

Which means that, thanks to these stimulus packages, any recovery is going be delayed – and to compound the error the delay will have to be paid for.

Consider in this context this article excerpted by Jeff Perren, which amid a sea of error contains this nugget of truth:

    The very first step in every “stimulus” program is for the government to go out into the market and sell bonds.
    When the government sells bonds, it takes money … out of the economy. Then, some time later, the government puts the money back into the economy in the form of spending or tax rebates or whatever. Later, when the data becomes available, economists are shocked, shocked to find that “consumers saved their rebates” or “business investment fell by an unexpected amount”, or “imports increased”, thus completely negating the “stimulus”. Their hopes dashed, but their belief in “stimulus” unshaken, the stimulunatics then call for more “stimulus”.
    The fact is that for the government to be able to sell the bonds in the first place, consumers have to save, or businesses have reduce their investments, or foreigners have to sell more in the U.S. Otherwise, where would the dollars to buy the bonds come from?

The fact is, the government has no way at all to “stimulate” demand and nothing to do it with -– all it can do is either redirect demand to unproductive areas (by bidding up the price of resources), or else stifle demand by not allowing prices to drop when they need to.

The popular notion that governments can stimulate demand is a function of the idea that the printing press is a substitute for real capital goods, and the flawed measurement of GDP which leads to the ridiculous notion that it is consumers that drive the economy.  But they don’t, and as George Reisman points out the notion that they do is a relic both of the Keynesian mythology and the flawed GDP calculations, which fails for the most part to measure real productive spending (i.e., spending for subsequent sales).  What the GDP calculation does instead is to artificially inflate the importance of consumer spending, (even as it denudes the productive of the money they need to be productive) leaving governments to think that sending out this money as shopping subsidies and “stimulus” packages will work.

It’s also a function of another flawed idea: the idea that (in the words of Fed chairman Ben Bernanke, “Our economic system is critically dependent on the free flow of credit.”  But as Peter Schiff explains, healthy economies aren’t so critically dependent on credit, only bubble economies:

    In truth, not all economies run on credit… In a legitimate economy, it is not credit that fuels spending and investment, but simply income and savings. It’s too bad our Fed chairman does not understand the difference…
    Credit is indeed vital to an economy, but it does not constitute an economy within itself. The important thing to remember is that credit is scarce, and is limited by the stock of savings. Savings loaned to one individual is not available to be loaned to another until it is repaid. If it is never repaid, the savings are lost. Loans to consumers not only crowd out more productive loans that might have been made to business, but they have a far greater likelihood of ending in default. In addition, while business loans increase our capital stock and lead to greater productivity, loans made to consumers are merely spent, and do not create conditions that will make repayment easier. When businesses borrow to fund capital investments, the extra cash flows that result are used to repay the loans. When individuals borrow to spend, loans can only be repaid out of reduced future consumption.
    One of the reasons we are in such dire straits is that consumers have already borrowed and spent too much. Many did so based on the false belief that ever-appreciating real estate would ultimately provide the means to repay their debts and finance their lifestyles. Now that reality has finally set in, why should the spending spree continue? The fact that a GDP comprised of 70 percent of consumption is currently contracting should not surprise anyone. In fact, such a contraction is long overdue and the government should not do anything to interfere.
    In trying to perpetuate the illusion, the government wants to revive the spending spree that has led us to this disaster. But how can such actions possibly help? How will more debt improve the economy? Wouldn’t our circumstances be vastly improved if we paid off some of our debts and replenished our savings? Wouldn’t we be in better shape if instead of buying more stuff we concentrated on producing it?

Wouldn’t we be better of if governments foreswore all the “stimulus” packages, and the deficit spending used to finance them, and instead got the hell out of the say so markets can correct?

Anything else will only delay what needs to be done: to flush out the malinvestments  so that genuinely productive businesses can adjust to new price levels and the new capital structure, and start producing again.  That’s what real recovery looks like.

If only the stimulunatics would get out of the way so that could happen.


  1. "Wouldn’t we be better of if governments foreswore all the “stimulus” packages, and the deficit spending used to finance them, and instead got the hell out of the say [sic] so markets can correct?"

    Brother, from your lips to the RNC chairman's ear... because Republicans still don't get it! Until or unless they do, or we get a viable 3rd party that does, we're in deep dung, because the Democrats passed the point of no return 40 years ago.

  2. Perfect cartoon, by the way. Great find.

  3. At the moment I've even given up the home that some governments will learn from this. I think they might already know perhaps. But they don't care. It's the chance of a life time for socialist to nationalise as much as they can, and inflate themselves out of their debts.

    It won't work. But the next generation, if there's one, will try again.

  4. The only government stimulus to the economy I can think of is Seppuku...

  5. Don't worry. When everything fails and the state-worshipping masses begin to realise the heroic state has not been able to enrich them (for free), then a great war will present itself. The leaders will embrace it. The masses will do likewise.


  6. So, how 'bout splainin' some of those errors Woodhill made? Nothing poked me in the eye on a first reading.


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