What Stimulus Stimulates
Thursday, 8/27/2020 09:01
Government borrows, government grows...
WHAT did the "stimulus plan" stimulate?
asks Brian Maher, managing editor of The Daily Reckoning.
This is the pressing question of economist Alan Reynolds.
The stimulus has not stimulated the economy...as demonstrated by second-quarter GDP.
The answer is obvious, says Mr.Reynolds, answering his own question. The stimulus stimulated government:
"The answer is obvious. Federal nondefense spending rose at a 39.7% annual rate. Big government spending can and does grow big government."
The fellow rings dead center. Big government spending can and does grow big government.
Meantime, loads more spending is on tap – depend on it. That is, loads more government is on tap.
Governments incline naturally to spending, as governments incline naturally to roguery, crookery and rascality.
The United States government tilts so steeply in spending's direction...it risks going over.
The entire creaking edifice rests upon a quicksand foundation of debt.
Most governments are limited in the amount of debt they can pile up. Thus, they are limited in the swinishness they can get up to.
But the United States government is unlike most governments. For it enjoys the "exorbitant privilege."
That is, the United States fields the world's premier reserve currency. And the world runs a bottomless appetite for its Dollars.
The United States can therefore run the presses at a clip truly astonishing.
And despite America's heroic go at the print press, its debt has never cost less.
Present yields on its 10-year Treasury bond scrape along at a vanishing 0.64%. Yields on its 30-year Treasury – at 1.33% – run scarcely higher.
Given these rates, the United States government can no more resist debt's seductions than a cat can resist catnip, a bee can resist honey...or a moth can resist flame.
The flame is drawing the United States in, surely, inexorably, relentlessly.
Here is the largest trouble with its government debt:
It is largely unproductive. It is a millstone about the neck...
During the Great Depression, John Maynard Keynes – later Lord John Maynard Keynes – put his general theory into general circulation.
Deficit spending can revive the animal spirits, said he, set industry's idle machinery awhir...and put the economy back on the jump.
Yet he wagged a stern finger, and warned:
Deficit spending is not an open-ended warrant for government extravagance.
Keynes insisted each Dollar of debt must pack economic oomph. That is, each Dollar of debt must yield more than it cost. Else it does not stimulate.
As Mr.Lance Roberts of Real Investment Advice reminds us:
"John Maynard Keynes' was correct in his theory that in order for government "deficit" spending to be effective, the 'payback' from investments being made through debt must yield a higher rate of return than the debt used to fund it."
But the vast majority of United States government spending fails Lord Keynes' exacting test...
The lion's take of United States government borrowings go to "social welfare". And to service existing debt.
That is, it goes largely to non-productive uses. Thus, it sedates and depresses – not stimulates. Roberts:
"As this money is used for servicing debt, entitlements, and welfare, instead of productive endeavors, there is no question that high debt-to-GDP ratios reduce economic prosperity over time. In turn, the Government tries to fix the 'economic problem' by adding on more 'debt'."
And so the "economic problem" deepens and deepens.
We recognize the lockdowns are unique economic catastrophes that bloated government spending. Yet they merely amplified existing trends.
It is easy to indict the poor fiscal management of the politician. Nothing is easier in fact.
But if we haul the politician into the dock...We The People must go with him...
"Kick the bums out" is the voter's eternal bellow.
But politicians are as they are...because We the People are as We are.
We demand a shining military machine with every whistle and bell. Heaping rations of Social Security and Medicare. A Rolls-Royce education. A million gaudy baubles.
But we do not wish to pay full freight.
"Hand it over," we bark out one corner of our mouth. "But do not dare raise our taxes," we belch out the other.
Let the politician take an honest man's attitude before the American public.
Let him tell us we can have A. Or we can have B.
But we cannot have A and B – and certainly not C.
Not without paying for it, that is.
Then observe the hard rain of rotting eggs concentrating upon his head.
10 times of the 10, we yank the lever for the silver tongue who tickles our ears with false but pleasing promises.
Half the country collars more in government transfer payments than it ladles out in taxes.
Is this the model of civic virtue? Is this Kennedy's doing for our country...or our country doing for us?
If doing for our country, it is a strange service indeed.
Many of us insist we are heart and soul for limited government.
But we are heart and soul for limited government...as long as it is the other fellow's heart and soul feeling the blade.
"Give me that tax break," says the one. "No, give it to me," says the other.
"You can both go scratching," says the third. "I deserve it more."
A fourth files a claim of his own.
Meantime, the hard-luck farmer wants his back scratched. The hard-pressed businessman wants his belly rubbed. The overlabored teacher wants her apple.
And millions more are alert to opportunity...
All striving to work the angles, to get a bucket in the stream, to get a snout in the trough, to catch a penny.
It is the evil of "special interests" when the other fellow gets his. But it is "democracy in action" when it butters our own parsnips.
We do not exempt ourselves from criticism of course. We enjoy having our parsnips buttered as much as the fellow next door to us.
Were the American people humbugged into so much debt? Or have we freely and knowingly put our names on the contract?
As we have argued before, two possibilities suggest themselves:
1) The elected officials of the United States are colossal rogues. They have amassed today's $26.6 trillion debt in abject defiance of the thrifty American voter.
Or:
2) The $26.6 trillion debt reflects faithfully the desires of the American voter. He has gotten what he wants. He believes he is getting value for money.
Option one mocks our cherished democratic theories. Option two stands in full indictment of them.
"Every nation gets the government it deserves," said 18th-century French philosopher Joseph de Maistre.
The American nation is of course no exception.
What does it mean for the future of our beloved American Republic?
Warned Mr.Benjamin Franklin long ago:
"When the people find that they can vote themselves money that will herald the end of the republic."
Just so. Yet still the circus goes on, entertaining as ever, paraded out daily in at least a dozen rings...
The frauds, the sweet lies, the charming delusions of democracy...
The great warfare of factions, the thundering collision of interests, each fellow trying to get it over on the next...
Pity the poor politician who has to referee and score the bout.
He cannot please us all. Yet he tries.
So today we lift a modest hymn of sympathy for the poor, fimble-fambling politician.
He is a man in an impossible fix.
Perhaps the arch-villain of our tale is not this politician – but We the People.
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