02.28.2010 0

Government Spending Does Not Drive the Economy

  • On: 03/09/2010 13:52:46
  • In: Fiscal Responsibility
  • By Josiah Schmidt

    As disturbing new reports come out this month showing that American reliance on government aid is at an all-time high, economists are attempting to quell concerns that the federal spending binge has gone too far. Government spending, they say, drives the economy, and the stimulus bills have saved the economy from dipping into depression. These economists have erred tragically, and their prescription will not only fail to prevent, but will actually help ensure that this recession worsens.

    It is saving, and not spending, that drives the economy. By consuming less than we produce, we can plough those savings into the production of factories, machines and technology, which will allow us to produce (and therefore consume) even more in the future.

    To illustrate, imagine Robinson Crusoe, stranded on an island. In order to survive, he must scavenge for food at all times. All his free time is devoted to merely keeping himself alive. Each day, he can only consume as much as he can gather. If he wants to increase his consumption in the future, then he must restrict his consumption in the present. He may want to fashion a fishing net, whereby he may increase his daily catch of meat. However, he must set aside some of his food today, in order to sustain himself while he forages for materials and constructs his net over the course of the next few days.

    Once the net is finished, he may be able to double his daily food supply, or even acquire the same daily supply of food using half the time and energy. In other words, Robinson Crusoe’s capital structure has been lengthened, and this lengthening of the capital structure was only made possible by saving.

    The same holds true for participants in a complex market economy. If an automobile company wants to produce more cars (or produce the same amount of cars with less time and energy), they must not spend out all of their income. They must restrict their present consumption expenditures and invest those savings into capital, which will make the production of cars easier, allowing them to produce more cars with the same amount of time and energy, or to produce the same amount of cars with less time and energy.

    However, once the capital structure is lengthened, all is not said and done. As capital is used, it wears down. It must be maintained, and eventually replaced. This too, requires a constant flow of savings. When government encourages spending and discourages saving, they are really encouraging present consumption at the expense of future consumption. Government spending stimuli ensure that there will not be enough resources saved up to maintain the current capital structure. This means that capital is being used up without being repaired or replaced.

    We are actually eating into our capital, and as we do so, production will become more difficult and the economy less efficient. As savings disappear, so too does the pool of funds with which firms can hire workers. As production atrophies, our range of production possibilities becomes more and more limited, and society shrinks further back toward the conditions of mere subsistence.

    At a certain point, of course, too much saving can be just as detrimental: there is no use in restricting our present consumption so severely that we starve ourselves out of existence. But, above that level of consumption necessary for survival, all savings lead to an increase in material wealth and prosperity. It is only through saving and lengthening of the capital structure that living standards may be raised and that our ability to spend and consume in the future may be increased. Understanding this fact gives the lie to the notion that the government’s “stimulus” bills (excuse me, “jobs” bills) do anything but eat away the economic foundation from right under our feet.

    Josiah Schmidt is a Liberty Features Syndicate contributor.

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