Liberals propose to follow the same game plan that gave us stagflation in the 1970s.
As success with the military surge in Iraq increasingly belies their claim that the war is already irretrievably lost, liberals have changed the subject from Iraq to the economy and the rising possibility of a recession. Liberal Republicans and Democrats, as usual, prescribe Federal deficit spending and higher taxes on “the rich.”
That is the doctrine of Keynesian economics, which advocates consumer spending as the exclusive highway to full employment and prosperity. According to Keynes, consumer and business savings must be offset by massively increased Federal spending. What the money is spent for doesn’t matter; just flood the market with money created by bookkeeping entries at the Federal Reserve banks.
Keynesian economics failed to end the Depression. Its repetition, as we saw in the bitter experience of Great Society stagflation in the 1970s, discouraged investment in projects of long-term value and led to speculations that promised high rates of return in the short-run.
For example, during the 1970s stagflation, is was only marginally profitable to build rental apartments, because the rate of return on those investments was far below the inflation rate. What occurred, instead, was an unprecedented boom in hotel construction, because room rates could be increased every day. By 1980, there was a shortage of rental apartments and an oversupply of hotels.
In the real world, the only road to non-inflationary economic growth is lower taxes, offset by reduced Federal spending, grounded on a stable currency.
Non-inflationary economic growth is not a product of consumer spending. It must be funded by business and consumer savings. Consumers who save will not max out credit cards and add to inflationary pressures. Businesses that save will make long-term capital investment in higher productivity that enables increased production of useful goods and services at lower cost. That higher productivity makes possible higher wages and an improved standard of living for everyone.
Federal deficit spending inevitably spurs inflation, which over time wipes out the purchasing power of people’s lifetime savings. Increased deficit spending is the way to go if we want to eliminate self-reliance and personal responsibility, while training people to turn to government for all their needs. That, of course, is a description of socialism.
Higher taxes reduce incentives to save, the only non-inflationary source of funding to grow the economy. Increased production funded by savings adds to consumer purchasing power when workers and suppliers are paid, without inflating the money supply.
In contrast, higher welfare-state handouts create artificial demand that merely raises prices, because of the time lag between the Fed’s out-of-thin-air addition to the money supply and increased availability of goods and services. That, of course, is a description of inflation.
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1971 Redux
We're heading back to the disaster of President Nixon's Keynesian economics of price controls, rampant deficit spending, and punishing inflation.
As asserted frequently on my website, Federal deficit spending is not a cure for economic recessions and unemployment; it's a cause thereof.
The January 18, 2008, Wall Street Journal editorial page elaborates further. Our current economic slowdown was triggered by the housing bubble and the subprime mortgage meltdown. Neither would have occurred without continuous Federal deficit spending funded by the Fed's creation of fiat money with bookkeeping entries. Politicians' Keynesian proposals for tax rebates and emergency spending will have the effect of pouring gasoline on a fire in the expectation that doing so will quench the flames. A temporary upsurge in economic activity may result, but it will leave the economy with still uncleared bad debts and excess inventories of houses and other goods. Inflation will inevitably increase, leaving people's savings and other assets worth less than before. Recessions occur when production in excess of real underlying demand can no longer be floated on excess money availability. When that happens, businesses find themselves with costs out of line with what the market will pay for their goods. Prices of goods have to be cut (witness the sharp declines in prices of new and old homes) in order to clear out excess inventories. To bring costs down low enough to make a profit at the new lower market prices, businesses have to lay off excess workers and cut wages and other costs. Intervention by the Federal government since the 1930s has aimed to block that process. Labor unions are supported in their demands that wages and jobs be unchanged. More excessive and inflationary money if created to pump up consumer spending artificially. Only by letting the normal action of a free marketplace eliminate excess jobs and inventories, a process that normally should be less than a year without government intervention, can we began to put our economic house back in order.
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"Federal deficit spending is not a cure for economic recessions and unemployment; it's a cause thereof."
Exactly. This situation is exacerbated by so-called conservatives who believe in the simultaneous application of tax cuts and exponential increases in government spending. Tax cuts are fantastic. Spending cuts are even better. No Republican president since Ronald Reagan (not surprisingly, I suppose, since they both came from the same family) has pursued a policy of reducing taxes AND reducing the size of the government. The real magic happens when you do both.
Comment by Patrick Mulligan | January 20, 2008