Winning essay: Why government stimulus spending is a bad thing and why you should care

By Simon Roberts

Congratulations Simon!

 

It’s common today to hear politicians in the US and the UK say that the government should spend money in order to stimulate the economy.

Their logic is that government projects create jobs, which means that more people have money to spend, and that this stimulates economic growth. Sounds simple. What can go wrong?

The problem is, it doesn’t work and it actually makes things worse.

First, let’s look at why it doesn’t work.

Government spending is allocated by politicians. Pretty much all government decisions are wrong, because they are geared towards special interest groups and short-term actions to achieve re-election. The long-term effects of policy on a nation are of no interest to a politician who is facing an election in 1-5 years. They care about today’s headlines and TV news reports, not whether their policies are going to cause energy shortages in 10-15 years or cause financial collapse in 30 years.

This means that the government spending is mis-allocated. A perfect example is HS2. £33billion to reduce the journey time from London to Leeds by a mere 50 minutes. A few short-term jobs created and no long-term benefit, but politicians are able to say that they are “doing something” to help the economy.

This thinking has been quite prevalent since the Great Depression, in which FDR’s New Deal is considered (at least by politicians) to have been a grand action to prevent disaster. Oddly, this view overlooks the fact that the New Deal transformed what would have been a short-term recession into a full-blown depression in which the unemployment rate did not go down for nearly ten years. It was a terrible mistake for the American people, but it allowed politicians to say that they were doing something rather than let the economy take it’s natural course and heal itself (but without the intervention of politicians of course).

So, government stimulus spending doesn’t do any real good, but does that really matter? If it fails to achieve a benefit, then at least it’s not caused any harm, right? Wrong.

We’ve already mentioned the New Deal, so let’s look again at HS2. That £33billion (an average cost of over £1,000 to every wage-earner in Britain) has to come from somewhere.

Governments have three ways to raise money. They can raise your taxes, borrow money in your name by selling bonds, or they can just print it.

The problem with raising taxes is that it takes money out of your pocket and gives it to the companies that are building HS2. Apart from the fact that you never asked for this to happen, it defeats the object. Any money injected into the economy by building HS2 was first removed from the economy by taking it away from you in taxes. There is no net benefit yet you are personally worse off.

To make matters even worse, when you raise taxes people become less productive. Why should you work that extra overtime or put yourself out to get that promotion when the government is just going to take nearly half the money away from you in tax?

Borrowing is just taxation put off until the future. When the government borrows, it has to pay interest, then pay the debt back at a later date. At that point they are back to square one – find the money from somewhere.

Printing money is just another form of taxation. It just makes every pound that is already in circulation worth less (that’s why prices go up). It’s an especially nasty form of tax, as you never see the money disappear from your pay check, but your weekly groceries or filling your tank cost a lot more and you get angry at Sainsburys or Tesco rather than the government.

Nothing is free. When the government spends money to ‘stimulate’ the economy, you pay for it – either now or in the future. It’s taken from you one way or another and diverted into projects which suit the aims of the government.

Ask yourself – do you trust politicians? Do you think they know best? Do you think they are spending your money on things that benefit you rather than them? No, of course not. So why would you think that government stimulus spending is a good idea?

22 comments on “Winning essay: Why government stimulus spending is a bad thing and why you should care

  1. Jigalypuff
    April 16, 2013 at 10:43 am #

    Very good

  2. Paul Shiels
    April 16, 2013 at 11:39 am #

    Simple but accurate.

  3. Acehole
    April 16, 2013 at 11:59 am #

    Bastiat would be proud.

  4. Jon
    April 16, 2013 at 2:46 pm #

    You use an odd example for government spending being for the short term given that HS2 won’t be realised until 2033. Your arguments are good but to assume all government spending decisions are bad is somewhat simplistic. Anyway who is going to spend money on important infrastructure if it isn’t initiated by the government? Sometimes the private sector cannot or will not step in and make up the shortfall but the spending is required.

    Congratulations though

  5. Andy
    April 17, 2013 at 5:42 am #

    Excellent.

    My only quibble is regarding:
    “When the government borrows, it has to pay interest, then pay the debt back at a later date.”
    Opponents will jump on this and point out (correctly) that the government never has to pay debt back and does not do so, they merely have to keep paying the interest. Through economic growth and inflation (money printing as you say) this burden diminishes over time.

    Except this time it will be different, we will go the same way as Greece and Cyprus. Sooner or later interest rates will rise and that will be the end of the last bubble – the bond bubble. At that point all hell will let loose and it won’t be pretty.

    • Simon Roberts
      April 17, 2013 at 5:28 pm #

      I understand your point, but loans are taken out on the basis that principle will be repaid. Whether the principle has been devalued through inflation was a point I could have made, but what I was trying to get across was that government borrowing is akin to borrowing in the domestic household – ie deferred payment.

      I was trying to keep this below the word limit and also keep the spirit that James had requested – that ‘ordinary’ people could understand it.

      I don’t think critics would overtly actually argue that debt never has to be repaid. That would be too much of an admission 🙂

  6. jazz606
    April 17, 2013 at 9:29 am #

    Andy, “…Except this time it will be different, we will go the same way as Greece and Cyprus. Sooner or later interest rates will rise and that will be the end of the last bubble – the bond bubble. At that point all hell will let loose and it won’t be pretty.

    ..”

    Except that we control our our own currency. The Greeks & Co don’t. Therein lies their problem.

  7. David
    April 17, 2013 at 10:02 pm #

    Congrats Simon, a very clear and well-written piece. I agree with everything you have written but I think the Statist types would attack this argument by pointing out the difficulties in moving from our current economy to a small State economy.
    The transition is needed but I think it will be incredibly difficult to do smoothly as people will need jobs in the private sector. These jobs also need to be meaningful with real career development opportunities, not flipping burgers at Macky Ds.
    I think the recovery will need to be driven by SME’s and trying to rebuild the industrial sector which should be possible if supported through lower tax, cheaper energy options and apprenticeship schemes.

    • Simon Roberts
      April 18, 2013 at 8:58 am #

      I’ve had this discussion a few times – how to move from statism to free market without adverse impact.

      The points I put forward are as follows…

      Less money siphoned off from the economy to sustain the State means:
      – more money available for investment
      – lower costs and therefore greater competitiveness
      – more incentive to be productive (lower taxes)
      – a happier, more positive populace

      A smaller State means less regulation (less reason to find tasks to occupy bureaucrats), leading to…
      – bad businesses allowed to fail and be replaced by good ones
      – companies are less afraid to employ full-time staff
      – companies are more competitive internationally

      I also point out that every job in the State sector with job security and career development only exists because people in the private sector are being sucked dry in order to pay for it and, in doing so, are having their own development prospects confiscated.

      I think the main reason that people have problems envisaging this is that they think in terms of ‘modern’ and ‘old’ – i.e. that the modern (Statist) system is better than what preceded it. Jarrow Marches and Tuberculosis.

      If people were to think instead of our economy against places like Hong Kong, they would start to understand how much better things could be.

      • David
        April 19, 2013 at 4:27 pm #

        I agree with all the points you’ve made and they would help to facilitate a larger private sector but people are often fearful of change and the Statist types will exploit that by claiming things like the private sector won’t be able to create enough jobs to fill the void created by reduced public sector spending so many more people will just end up on the dole.
        They’ll also claim that we simply can’t compete industrially with countries like China plus other lines of attack intended to scare and intimidate the populace.
        I think Britain could adapt well providing we significantly cut taxes and energy costs and start rebuilding skill bases but I accept that the vested interests could portray it as some scary step into the unknown (especially for State employees).
        The useful idiots and lefty mouthpieces like the BBC would also probably try to sabotage things too, knowing them.

        I’m fully in favour of a small State, low taxes, and a thriving private sector but it’s going to be very difficult shrinking the junky State sector, reinvigorating the Private sector after it’s been abused for so long, and dealing with the aggro from the useful idiots all at the same time.

  8. jazz606
    April 18, 2013 at 7:14 am #

    We also need to prise education free of the educationalists.

  9. Chris
    April 19, 2013 at 8:11 pm #

    “A perfect example is HS2. £33billion to reduce the journey time from London to Leeds by a mere 50 minutes. A few short-term jobs created and no long-term benefit, but politicians are able to say that they are “doing something” to help the economy”.

    I disagrew with this statement. It’s a common misconception that HS2 is about reducing journey times. It is not. It’s about capacity or lack of for the West Coast Main Line (WCML).

    From Network Rail: “The West Coast Main Line connects our biggest cities and carries over a quarter of all rail freight, but by the mid-2020s parts of the line will be full”.

    Having an essay based on misconceptions (errors) is not what I class as winning.

    • Peter Melia
      April 25, 2013 at 10:03 pm #

      Thanks, Chris. Here was I, wrongly, as it happened, getting myself upset about the costs of HS2, all those millions, just to make it easier for the privileged rich and the politicians to travel to provincial cities. I can relax now that I know it will be used to convey freight at near supersonic speeds!

    • john freestone
      May 2, 2013 at 11:38 am #

      There’s another line that can be used from London to the Midlands – it used to run from Paddington to Birmingham before being diverted to Marylebone in the 1960’s. It used to take high speed expresses to Brum in 2 hrs. Why not reopen/upgrade it? Much cheaper than HS2! iNFRASTRUCTURE IS MOSTLY STILL THERE.

  10. Simon Roberts
    April 20, 2013 at 6:51 pm #

    I believe the point is that it is a publicly-funded stimulus initiative.

    I would hardly expect the immediate beneficiaries (Network Rail) to say that it wasn’t needed.

    If the market requires additional capacity on the WCML then the market will bear the cost. This is simple Supply and Demand.

    The real benefit is to politicians, e.g. so that David Cameron can make statements like “vital for Britain if we’re going to succeed in the global race” and the DFT can say that the project will “create at least 100,000 jobs” both of which are clearly nonsense.

    • Chris
      April 21, 2013 at 1:16 pm #

      So Network rail are telling lies? The real benefits are in the growth of the economy. Allowing more passengers and freight to be carried. People seem to forget that rail freight is also growing and helps keeps trucks off our roads and reduces pollution.

      Boris talks about a new airport in the Thames estuary. Do you think that private industry is going to gather £50 billion needed to build it and all the surrounding infrastructure?

      Who do you think invested in the motorway network?

      Who do you think invested in the UK’s previous generation of nuclear power stations? The private sector is so dependable that both EdF and Hitachi are seriously considering walking away form these projects.

      Do you think the private sector would have built the TGV network in France?

      You cannot rely on the private sector for everything.

  11. David
    April 21, 2013 at 4:01 pm #

    The trainlines in Victorian times were privately funded because people believed in the business sense of the investment. If HS2 is such a great idea then why are taxpayers having to cough up for it?

  12. GAI
    April 24, 2013 at 11:57 am #

    About bonds:

    Governments raise money by selling bonds to people, banks mutual funds…

    The people who buy those bonds expect to get back the principle plus interest. If the government can not meet those debt obligations it bankrupts. (Think Greece, Iceland)

    Before a government bankrupts the politicians will grab any source of revenue to save itself.

    We are presently seeing that happening here in the USA and elsewhere…

    California Government Looting Safety Deposit Boxes for General Fund

    The next Target: Your Inactive Bank Account Hundreds of millions of dollars in inactive bank deposits are likely to flow to the Federal Government from May.

    John Galt has some interesting charts on Money Velocity, a real measure of economic activity. For the USA it has gone through the floor. Remember the government takes a cut every time a dollar bill changes hands. If you use credit cards for all your purchases, the bankers get their cut too. If the money does not change hands then the government and banksters don’t get a cut.
    http://johngaltfla.com/wordpress/2013/02/26/the-bankers-next-target-your-inactive-savings-account/

  13. Pragmatist
    April 29, 2013 at 11:31 pm #

    Great work. It’s ironic that those who argue for the most public spending care the least about how it’s funded. The sad truth is that the UK can’t afford enough pensions, hospitals or schools, let alone high speed trains. We’ve already hit the buffers. The free ride is over. Unless we increase production to the point that public spending represents 35% of GDP we’re doomed.

  14. john freestone
    May 2, 2013 at 11:53 am #

    Good essay Simon, but: it would be nice if we could rely on the private sector to provide everything we need, and Government was kept small…..but remember that the bottom line for private sector is PROFIT. The Victorians built the railways as speculative ventures (see George Hudson, the Railway King of the 1840’s

    Railway Mania of the 1840’s)
    Some lines were offering 12% interest and soon went bust! Some like the LMS became rich by carrying coal but passengers wrere never profitable until Parliament insisted they were to be carried in the National Interest. Too big a project would need vast capital, which might be unavailable unless the banks agreed to lend, on their terms of course. Do we always want to be at the bamks’ mercy?

  15. David
    May 4, 2013 at 3:44 pm #

    Hey guys I know this thread is a few weeks old so I’m not sure if anyone is still reading it but I found a good posting on Mises.org that ties into what we’ve discussed here so I thought I would provide the link for anyone who is interested or stumbles on this post at a later date, here it is:

    http://mises.org/daily/6420/Two-Sides-of-the-Same-Debased-Coin

  16. David
    May 4, 2013 at 5:20 pm #

    Here’s some good podcasts from the same site:

    http://mises.org/media/categories/231/Why-Austrian-Economics-Matters

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