‘Stimulus’ Is Anything but Manna From Heaven

March 23, 2009

For release March 25 and thereafter (685 words)

Media reports on the Obama stimulus package have been euphoric, to say the least. Sometimes I think I’m reading and hearing about an economic miracle of epic proportions — you know, something akin to the manna that God provided the Israelites during their 40-year journey to the Promised Land.

But then I come to my senses and remember that manna was a net addition to the Israelites’ food supply. It was not pilfered from a subset of the Israelites to be “given” to their compatriots.

Not so for Obama “stimulus” dollars. All the dollars and then some will be taken — that is, confiscated — from Americans. Does it matter whether the dollars come from taxes, government borrowing or the government’s printing press? Not at all. These are just three of the ways governments confiscate private wealth.

Income, sales and a myriad of other taxes forcibly tap the government into the gains that buyers and sellers reap from goods and services flowing through the marketplace. Exchanges, for which the tax wedge exceeds these gains, simply don’t occur — the power to tax really is the power to destroy. Lost exchanges don’t yield any tax revenue but their disappearance still harms buyers and sellers. Economists call this latter harm “dead-weight loss.”    

More problematic, at least for some, is the fact that government borrowing also confiscates private wealth. This is because, on the surface at least, no one forces people to lend to Uncle Sam. But Uncle Sam’s ability to borrow hinges ultimately on his ability to repay at some future time. How? By levying future taxes. Government borrowing is delayed tax confiscation.

The inflation that results when the government fires up its printing presses to finance its spending initiatives also confiscates private wealth. In this case, government taxes peoples’ desire to hold and use money. For example, suppose I want to maintain a money cushion equal to $1,000 of goods and services at current prices. A 10 percent inflation confiscates $100 of that cushion just as surely as if Uncle Sam snatched $100 out of my wallet. Economists call confiscating private monetary wealth via inflation “seigniorage.”

So am I saying the Obama initiatives merely “reshuffle the economic deck?” To wit, some people get more, others less, and that’s the end of the story? Nope, there’s more to the story, and it’s not pretty.

Confiscating private wealth — be it current production, future production, or money itself — reduces peoples’ incentive to generate wealth. Hey, when Robin Hood stole from people going through Sherwood Forest, fewer people made the trip. This means people pay twice for the stimulus initiatives. Once, when they pay taxes on exchanges that continue despite the confiscation, and a second time when otherwise productive exchanges are eliminated. In other words, what the government spends costs people more than their tax payments. 

Some die hards might be thinking, “Whoa, professor, you’re ignoring what Uncle Sam buys with those stimulus initiatives.” Am I? There are things that are best done collectively, i.e., things that would not otherwise have been produced such as national defense, flood control and secure private property rights. But one would have to suffer from yet more delusions to think that such goods and services what the stimulus initiatives are about. Indeed, the concomitant wealth confiscations are the polar opposite of securing private property rights.

Milton Friedman noted that spending someone else’s income for the benefit of someone else dulls one’s incentives to be concerned about how the money is spent — in terms of both how much, and on what. So whatever the two-fold dollar cost of stimulus initiatives, it follows that one should be skeptical about the usefulness of what ends up on our collective plates.  In other words, a smaller bang for a bigger buck.

What a deal, huh? Yes, if you’re delusional.

Norman T. Van Cott, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is professor of economics at Ball State University.



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