Friday, February 13, 2009

Pushing Paper Around

John Tomlinson has written an excellent article regarding the economic stimulus package. To sum it up, a good portion of the economic stimulus has nothing to do with stimulating the economy and most of it will not be spent until between 2010 and 2019, when the recession is either healed or over with.

I would also like to add that regardless of its purpose any economic "stimulus" that the government proposes is destined to fail and will only make things worse. The government *cannot* create wealth, it can only destroy it, due to its current method of funding, taxation, and its two methods (direct and indirect). Direct taxation is direct confiscation of the money of private citizens, which is the most explicit form. Indirect taxation, however, is much more secretive (perhaps even to politicians ignorant of economics) as no physical object is being taken, but rather its value. This is done by printing money. Since we have a fiat monetary system (money that is not backed up by any valuable commodity), the value of each unit of money is prone to changing according to the total number of units. When the government prints money it has confiscated the value of the monetary wealth of private citizens and the ignorant never even notice it.

This is why the stimulus will fail: when an excess of money is printed the prices go up to accommodate the new cash, which leaves the economy right in the same position as before. But it is during the transition when people are benefited and hurt by new money. For example, say that the government prints money for an economic stimulus so that persons X may have a higher "purchasing power." When they receive the money they start immediately spending it at their desired stores to get more goods and services than they did before, and to deal with this increase of demand the stores increase their prices. But persons Y did not receive any of this money and now they have to deal with higher prices; they can buy less goods and services than before. Persons X, in this situation, was only able to benefit at the expense of persons Y. Of course, on the total, everything balances out and nothing has been lost or gained.

If we are lucky that is possibly all we will have to deal with, but given how people depend on the government we may see corollary actions. To go back to persons X and persons Y, let us assume that persons Y is outraged with the "unfair" price increases and then demands that the government set price ceilings so that businesses only take their fair share. What happens then? Given the artificial purchasing power now belonging to both person X and Y, the demand for the given products and services will succeed the available supply, leading to a shortage. Worst yet, given the limitations on profits, the particular businesses either will not have enough capital to continue business (and will go bankrupt) or do not have any incentive to replenish their resources, which leads to scarcity. Wanting to get a bigger share of goods and services, persons Y has foolishly created a situation where there are fewer goods and services.

The ball rolls on however! What if, in an attempt to remedy the problem, the government makes the particular businesses' resources forcibly cheaper? Now we have scarcity in increasing circles that not only harm the standard of living for persons X and Y, but also for A, B, C, Z and so on. What started out as a temporary imbalance of purchasing power between groups has turned into a full-blown depression.

To refer back to the real economic stimulus, all the simple errors inherent in it can be recognized merely by spending a few days with an introduction to economics book, which means that these politicians know the stimulus is going to fail and are purposely pursuing it because they see the opportunity for a power grab. Let us retain this in our memories, so as to keep in mind the cause of all the bad things we have coming to us.

2 comments:

Jim said...

Given that some amount of the money will not be spent until after the next mid-term elections, then shouldn't Republicans be expected to promise to repeal that future spending if given the majority.

Not to say that they would; I was just pretending for a moment that the Republicans would be consistent.

Benpercent said...

Sorry it took so long to post your comment. Oddly enough I was not notified until just now.

Anyhow, yes, I agree with your position. Given how much Obama has managed to "accomplish" in less than two months of his presidency I would not be surprised if people were reeling by mid-term elections. Never have we seen a more ample time for activism.