Editor’s Note: This was originally posted on Mises.org
I ask you to consider the absurd discussion of a stimulus package designed to rescue the U.S. economy from recession. The idea is that the U.S. government will inject funds into private markets to stimulate them to the point that they will run on their own. Not once in this debate have I heard anyone ask the core question: where is this money going to come from?
It seems that Washington wants us to believe that they have some magic machine that can turn up $150 billion in new assets without anyone having to do anything to make these assets appear. One wonders, then, why we need to wait until a recession to stimulate the economy. Why not magically create hundreds of billions every day, and not just for this country but for the entire world? Why are we holding back?
Now, the ideas of the stimulus package are not 100% awful. Some people are talking about tax cuts, which is a good thing but rather pointless without spending cuts. I’m particularly intrigued by the underlying assumption here that taxes work as a drag on an economy whereas tax cuts fuel expansion. If that is the case, and is indeed true but for different reasons than Washington gives, why wait until the recession to cut taxes? If taking less from us is good for the economy, we should institute this as a universal policy.
One great lesson of political economy, emphasized for centuries, is that the government creates no wealth of its own. Everything it has it has to get from you and me, one way or another. It can tax. It can borrow. And, finally, it can inflate by means of credit market manipulation. This third option is the most disguised. When people hear the words monetary policy, they figure that this is something they will leave to experts. And central bankers have an astonishing talent for obfuscation to the point that no one knows with certainty precisely what they are doing.
The whole show is designed to make us go to sleep and not think about what is really going on. The unvarnished truth is that when the United States Federal Reserve artificially lowers rates, it is creating new money that waters down the value of the existing money stock, yielding a lower purchasing power for the dollar. That’s another way of saying that it creates inflation – perhaps not right away, and perhaps not across all economic sectors, but eventually and certainly.
This, my friends, is a form of breaking windows. It is wealth destruction. It matters not that there will be more dollars to spend, because prices will be higher and wealth has been drained out of the private sector, and redistributed within it. It is Bastiat’s fallacy reinvented in a new form.
New money also distorts production structures. At the very time when the market is pressuring long-term investment to pull back, the lower rates encourage expansion in ways that prolong the crisis. It only delays and worsens the inevitable. The Great Depression taught us that government is capable of doing this to the point that the crisis can last for 17 years. So this is no small matter. A government determined to prevent recession is a government that might end up sustaining one to the point of the collapse of civilization itself.
It is a perverse belief, but pervasive nonetheless. It is believed by both political parties. It is held by the president, the media, and the congress (except for Ron Paul). It is a reflexive belief, one that reflects a failure to think between stages and see the unseen effects of government intervention.
One reason that Bastiat’s example has power is that it applies not just in one area of policy but all areas. If it isn’t true that breaking windows creates wealth, it is not true that government spending and inflating is a boon to the economy. It only ends up draining wealth from the private sector, which is the only source of wealth creation.
It doesn’t matter what the government spends money on. For example, building pyramids with tax dollars is not good for the economy, despite what Keynes claimed. But neither is waging war good for us or the victim country, despite constant claims to the contrary.
It is surely one of the most deadly myths that the Second World War ended the depression. As Robert Higgs has shown, it further prolonged it, all phony data aside. And consider the spending on the war on terror. If government spending were capable of stimulating the economy, the U.S. would not have recession right now.
Chris Westley assembled some data on the last seven years of U.S. economic conditions, and it is sobering indeed. Since 2000, tax revenues are up 25%. That’s wealth destruction. Government spending is setting records for expansion, with $1 trillion added to the annul budget, with military spending up $250 billion each year over the egregious $400 billion spent annually in 2000. That’s wealth destruction. The national debt is up 59%. That has to be paid. More destruction.
Social security liabilities are up 60%. That too is the promise of future destruction. The money supply is up 72%. More destruction. Inflation itself has risen 20%, so the dollar of 2000 is now worth 80 cents. The gas price alone is up 118%, so that too is wealth destroyed. As an indication of economic trouble, the gold price is up 206%.
Here is the story so far of the government’s great stimulus. It has led to hard economic times. More of the same will create more of the same and worse. The unemployment rate is rising. Savings are falling. Prices are rising. We are less secure, less prosperous, and we have fewer opportunities than ever to dig our way out of this mess.
Government expansion has actually created the absurd scenario mentioned above. The boy threw the rock, the crowds in Washington believed the sophist, and now they are plotting to raze all homes on the block, in the name of economic recovery.
Have we learned from the Great Depression? Ben Bernanke believes that he has learned something. He believes that the key problem of that period was a failure of the central bank to pump in enough money and credit. He has never absorbed the critical observation of Rothbard that the Fed did attempt to pump up the money supply from 1929-1934. They used every mechanism, but the credit markets found few takers, and without their cooperation, the money supply does not expand.
The real lesson of the Great Depression is that there is nothing that the central bank can do to forestall a recession whose time has come, and nothing government can do to improve the situation once the recession has arrived. Everything it attempts to do – except shrink – only ends up making matters worse.
So it is in our time. We must ask ourselves what Washington is capable of doing this time around. I believe that the answer is anything and everything. Bernanke will attempt to flood the economy with money. Washington is perfectly capable of imposing price and wage controls on the entire economy. It is capable of terrifying levels of protectionist legislation. New taxes are less likely but taxation through debt accumulation is probably inevitable. There might be rationing, spending mandates, anti-hoarding legislation, and more.
The assumption that driving up consumption is the key to prosperity is particularly dangerous, and also pregnant with irony. During good economic times, we are hounded constantly by the intellectual elites for our consumption habits. It is said that we are a greedy nation, buying ever more fripperies and not looking after the long term. The American public is decried by the intellectual elites as materialist, consumerist, and short sighted.
Then recession hits and the tune changes completely. Reliable leftists, fresh from having complained about the egregious spending habits of the American consumer, suddenly turn on a dime and tell us that more consumption is the key to economic growth. They favor policies that would get us to fork over ever more of our money, under the belief that the core problem is a lack of demand!
A recent example is Barack Obama, who said last year that the problem with popular culture is that it “saturates our airwaves with a steady stream of sex, violence and materialism.” But only this week, he seemed to endorse one of the three. “If the economy continues to decline in the coming weeks, we should send checks to people,” he said. “This is the quickest way to help people pay their bills and get them to start spending.”
In fact, less spending and more saving is what is called for during a recession, which is nothing but a market correction writ large. Attempting to coerce spending threatens the value of the dollar itself.
Here we face a very dangerous situation. If the dollar ever ceases to be the international currency of choice, and this could happen, we could face roaring inflation. And with dreadful legislation that prohibits any kind of choice in currency, Americans will be stuck. Here is a problem that could cause near panic in Washington.
The irony here is that after a century of failed interventionism and socialism, Washington is no less likely, and probably far more likely, to take the path of least resistance and accumulate ever more power unto itself, at our expense.
We are in an election season, so of course people ask who would be the least bad person to head the state in the years ahead. The answer here is not at all clear, if it is not Dr. Paul. As with the 1930s we face a choice between militaristic fascism and Keynesian-style socialism combined with environmentalism. These are two very grim choices.
I tell you this not to spread gloom but merely to be realistic about the prospects for the future of American politics. But there is also good news to be considered. The private sector has raced so far ahead of the state, and is so global, that it is far more resilient than before. There are safety valves available in the form of international capital markets.
The U.S. government is so much bigger now than in the 1930s, but, paradoxically, that also makes it less effective than it once was, which is very good news. It is a massive, lumbering giant, whereas the markets are a speed racer.
I might also point out that the U.S. government enjoys nowhere near the respect it once had. Once the governing elite consisted of the nation’s elite, coming from the best families and the best schools. Today, the governing elite has never been more transparently ridiculous and even freakish. Gone are the aristocratic public servants of yesterday; today, the government is made up of a class of hucksters and gangsters that inspires no confidence.
This is all to the good, for as Mencken said, it is always great when we do not get all the government we pay for.
On the intellectual level, the teachings of economics in the Austrian School tradition have never been more available to the world, or more frequently cited and discussed. And a recessionary environment guarantees more attention to the Austrian theory of the business cycle simply because this is the only model that makes sense of our current problems.
We should never underestimate the power of ideas to make a difference in the world. During the Great Depression, the resistance to the state was present but weak. Today we have built up a mighty intellectual army that extends across the globe. We are prepared in ways that they were not. We have thousands of students and faculty, and men and women of affairs who know real economics. We have the internet. We have new books that put the whole problem in perspective, such as Jesús Huerta de Soto’s work on business cycles. We have the biography of Mises now, and it illustrates the heroism of political dissidence. The works of Rothbard on the Great Depression and central banking have never been more widely circulated and available. This time our masters in Washington will not go unopposed.
At the Mises Institute, now in our 26th year, we tried to maintain a careful balance between serious and fundamental scholarly work, and public advocacy. We must never lose sight of the need for research and detailed work. It is not enough to merely repeat slogans. At the same time, there are some foundational lessons of economics that must be taught again and again with each new generation. The fallacy of the Broken Window is one of them, and its implications are truly radical.
Both Bastiat and Hazlitt saw that the government is the great window breaker, that destroyer of wealth that drives the economy backwards. The engine of creativity, recovery, and expansion is the private sector, completely unencumbered by state intervention. Ron Paul’s newest book is called Pillars of Prosperity: Free Markets, Sound Money, and Private Property . The title nicely sums up the message of the economics of freedom.
It bears repeating in every age, in all places, for we will never be completely free of the great threat of the window breaker. So long as there are governments with stones ready to throw, there will be a need for someone to point out that destruction is never productive, never beneficial, and never a path to the good life that we all seek.