I’ve written before about our government’s problem with the economy, as witnessed by their mistaken belief that the government can spend the nation back into productivity. Part of this belief is that there exists some magical multiplier of government spending. The theory goes something like this: when the government spends a dollar on some project, the effect on the economy is greater than the original dollar. It magically multiplied!
As theories go, it’s fine. The problem happens when the ivory-towered Gedankenexperiment is tried in the real world. I’ll simplify this to make it clear: three people, Peter, Paul, and George are the citizens of Madeupistan. To stimulate the economy, George takes $10 from Peter and gives it to Paul. Wealth has not been created, it’s only been transferred since Peter is now $10 poorer and Paul is $10 richer. The net effect on the economy is $0. And this is the best case scenario.
What really happens is far worse. George takes $10 from Peter and gives $4 to Paul. George pockets the other $6 as his handling fee. And as long as George takes money from Peter to give to Paul, both George and Paul are happy with the outcome. Any election or referendum on finances in Madeupistan pass with 66% of the vote as George and Paul are solidly behind the stimulus spending. Peter keeps voting against having his money taken away from him to fund George and Paul, but he’s in the minority, and so he loses. George starts keeping $7 from the money taken from Peter since he has to pay for the increased advertisements needed to demonize the evil greedy rich Peter. Paul doesn’t like getting only $3 when he was getting $4 before and was used to it, so he petitions George to increase the rate of fiscal confiscation from Peter. Eventually Peter gets fed up with having his money seized, so he moves to Freedonia, taking his business and money with him. George then starts eyeing Paul as the new source of stimulus funds.
Policy wonks and university intellectuals love the ideas of John Maynard Keynes, but Keynesian economics just don’t work in the real word. When the government “stimulates” the economy with spending, it does so with money first taken from the people, or with freshly-printed money that is taken from future generations. And in either case, the government keeps some of the money to pay for the process of transferring the money. And the net result isn’t a magical multiplier increasing the wealth and economy of the nation; it’s a unmagical divider doing the opposite. But government will continue to push for Keynesian economics because they get their cut of the money, and they get to say who receives the money and reap the political benefits of their largesse.
If the government wanted to truly stimulate the economy, it would get out of the way by reducing taxes on corporations and people. And this isn’t some wild speculation or untried theory in Madeupistan. It has worked every time it has been tried in the real world.