Obama's Stimulus: Stones Into Bread

We are currently facing the worst economic crisis since the Great Depression, and some argue that it may be longer and deeper than the years following Black Friday. The United States of America currently borrows more money than every other debtor nation in the world combined. America’s trade deficit is also larger than all other nations’ trade deficits combined. In general, America has spent far too much on borrowed money and has produced far too little. In order to revisit a sustainable standard of living, most Americans will be forced to reduce their standards of living. This adjustment that individuals across the country will be forced to make will involve becoming more productive and consuming less.

There has been much debate regarding the appropriate response to expect from the government during this economic crisis. So far, trillions of dollars have been appropriated in the name of rescuing the country from complete economic collapse. Most of the debate heard from the mainstream media and the politicians has revolved around how we should spend money in order to most effectively rescue us all from the decline. Unfortunately, this question implies that government spending is the best answer to our current crisis. The more the government spends, the greater the depression they are encouraging.

The current economic crisis has been caused by excess borrowing and spending in comparison with production. The Federal Reserve Bank kept interest rates far too low for far too long which created an unsustainable environment in which business flourished. The intervention into the market created circumstances in which businesses could survive for quite a time, as long as the money supply continued to increase quickly. However, permanently low interest rates are impossible to maintain. Permanently low rates debase a currency due to the exponential rate at which the money supply grows during such a period. The inevitable fall of a currency that is abused in that manner is much more painful than anything America has seen in the last century.

Ironically, the approach to fixing the problems caused by interest rates being too low and too much spending is to lower rates further and spend more. The Fed has lowered the Federal Discount Rate to 0.5% and the Federal Funds Rate to 0.25%. Additionally, there are bailouts that are slammed through Congress that now total in the trillions. The funds from the bailouts are going to be appropriated for nearly every project under the Sun. Relieving unemployment is a common theme within many justifications of the record-setting spending. A closer examination of government spending will expose the fact that the creation of jobs through government funding will only worsen the problem.

In order to understand the general negative effects of government spending, you must logically examine the total effect of the appropriation. President Obama has repeatedly claimed the ability to create jobs. Until both sides of the coin are looked at, Obama seems to be right on track. Now, let’s look at the other side of the coin: To create jobs, the government needs capital. The government does not have capital at its disposal besides what it takes in taxes, borrows, or prints. When the government taxes in order to fund the projects that create jobs, they reduce the resources of the private individuals and private enterprises. This taxation will require a contraction of the private sector that is proportionate to the public sector increase. (The same effect is had when the government borrows money or prints money. However, for the sake of simplicity, we will only examine taxation.) In effect this “job creation” is simply “job redistribution” from the private sector to the public sector. For example, if a government funded bridge project requires $100 million, the government must tax $100 million from the private sector. Taking the $100 million from the private sector will eliminate jobs that would have been available before the taxation. Taxing the private sector reduces the resources available for employment expansion and changes the cost to benefit calculation when a company is deciding on staffing. Essentially, when the government creates jobs it takes resources from the private sector and uses those resources according to the plans the centrally run government makes. Jobs aren’t created in this manner, only redistributed, as is capital.

Following this realization, it would be easy to misunderstand the economics of government spending to conclude that creating jobs through government spending is ineffective but insignificant. Some might look at public vs. private spending as an even sum game. However, there is a distinct difference between jobs created by the government and jobs created through the private sector.

Jobs created within the market are simply arrangements between an entrepreneurial entity and an individual who is willing to work. The employee must consider the job offer to be his best option and the entrepreneur must determine it to be profitable to hire the employee. The entrepreneur will ultimately be responsible for the profitability of his company. When considering whether or not to hire an employee, the business man considers whether or not hiring the employee will allow him to serve customers more profitably.

In a free market, the profits go to the business men that create a profitable system that best meets the customer’s needs. Since the existing private sector can only exist if consumers decide that their products or services are worth purchasing voluntarily, the consumer has verified that sustainable private enterprises are entities that serve the customer the most completely. The companies that exist have proven that they are able to manage their capital in a way that more efficiently meets customer’s needs. The more efficiently the capital is used to meet the customer’s needs, the more profitable the business.

In sharp contrast, the projects that the government undertakes in order to create jobs do not succeed or fail based on what the consumer decides. Instead, government projects receive funding based on political decision. This allows for the opportunity for corruption and catering to special interest groups. However, even without the possibility of corruption, government projects to create jobs are economically harmful. Government funded projects are not nearly as beneficial as privately funded enterprises because they lack the insight the individuals in the marketplace possess. While individuals in the marketplace make decisions voluntarily and according to their knowledge, experience, and values, government spending is appropriated based on a central group of planners.

A central group of planners cannot understand the different values that each individual bases each decision on. Instead, the government relies on coercive measures to take money from the private individuals and private enterprises and spends it how the planners decide. Since the planners do not understand each individual’s preferences and values, they have no way to synthesize them into an effective model to determine whether or not a government project is worth undertaking.

Instead, the projects are a shot in the dark at providing value to individuals within society. Not only are they un-aimed attempts to create value, they take away from the private sector. Taking away from the private sector in order to give to the public sector is counterproductive. Since the private sector is regulated by the consumer who is the ultimate judge of who succeeds and who fails and the public sector is insufficiently regulated by central planners, the most efficient system for capital management is the free market.

Not only is the free market a superior system in regards to capital management, it is a better system to reward socially beneficial behavior. Capital accumulation and management are very important because the amount of capital that is available directly correlates with how much production can take place. The more capital accumulation companies and individuals have, the more people will be able to be employed and more capital investments (such as machinery or raw materials) will be made. The ability to employ people and to produce efficiently depends on the amount of capital accumulation.

The government is currently making attempts to free up the consumer credit market and actively encouraging people to spend more. This misguided attempt to fix the problem is exactly what our economy doesn’t need. Once again, we will be digging ourselves deeper into the patterns of behavior that brought us to this crisis in the first place. The effects of such spending include a reduction in capital accumulation and will result in a less productive economy.

Additional government spending also creates an environment that incentivizes the worsening of the problem while the free market naturally creates incentives that would lead us out of the current crisis. Once again, we are currently in a crisis caused by too much spending, too little saving and too little production.

Government spending through inflation of the money supply carries the consequences of inflation, including higher prices. When inflation is expected, people begin to move out of a currency and to other currencies or other assets to hedge against inflation. Many people moving out the dollar will add to rising prices, due to the falling value of the dollar. Saving is discouraged by an inflationary monetary policy and spending is encouraged. When saving is discouraged, capital accumulation is slowed and spending of all kinds are encouraged. To contrast, when the market is allowed to work without the government’s interference, a crisis that we are in now encourages the individual to accumulate capital. Market interest rates will rise as less capital is available, leaving less incentive for spending and more incentive for saving. A recession that is allowed to take its course will naturally create an environment in which people decide to borrow and spend less. Incidentally, spending less, saving more and paying off our debt is the only way to capital accumulation, which is necessary to begin to work our way out of the hit that our economy has taken.

Under the free market solution to this problem, the standard of living will drop to a sustainable level in comparison to our production. As the market was freed up, the private sector would be able to manage its resources instead of handing them to the government to manage. This adjustment would lay the foundation for the greater production that would be necessary to begin a bounce back in the general standard of living for Americans. It would be painful for a while, but at least we would be working our way toward a sustainable economy.

While Obama tells us that millions of jobs will be created by his massive stimulus plan, public works plan, and other government spending, the diversion of resources will simply take capital from the private sector and give it to the public sector. Redirecting resources to the government will allow for the capital that is taken to fall under management without the checks and balances that the consumers provide within a free market. Innovation will be thwarted and capital will be mismanaged, only adding to our economic decline.

The reason that America became the greatest and most prosperous creditor nation in the history of the world, was because we were the freest from government intervention for a large portion of our history. The government entering further into subsidizing and regulating the market is the reason that America’s place as the most productive country in the world will soon be history.

*clap*clap*clap*
"wonderful"

typo in paragraph 4 - S in "Sun" should not be capitalized.

The only concern I have is that it is more designed for an economy magazine and maybe a little too educated for a newspaper. Actually - WAY too educated for not only a newspaper, but any media outlet.

Thanks BT. It will be printed and out on Thursday. I would encourage others to write. B-Ran, BT, MJJ, and other people we know would have a lot of good to add to local publications.

Great article.
It lays it out there plainly, but not too simply.
Some of the sentence structuring makes it a little difficult to read smoothly.
I agree with BT, it seems more geared toward something more sophisticated than a newspaper, not that you need to dumb it down or anything. I guess it's more of a formal logical argumentative piece rather than a persuasive essay.
I liked it though, and i hope it gets a great response.