Friday, February 13, 2009

The Tooth Fairy Cometh

For some days now, I have been debating whether I want to write this particular Journal entry. I try to keep things light-hearted, and focused on Caledon and related areas, or, at the very least, Places on the Grid. This is neither light-hearted nor Grid-related. Still, some things must be said.

Eight hundred billion dollars of additional port-barrel spending! Money that the U.S. government does not have, ostensibly for the purpose of “stimulating” the economy. This is more than irresponsible; it is insane. We are mortgaging our future for a minor goosing of spending and an audacious power grab by craven politicians. Consider:

1. The price tag will only grow, as no one can imagine that new spending, once in place and staffed with empire-building bureaucrats and attracting a rent-seeking constituency, will ever fade away. The additional spending will continue for years to come.

2. The money has to come from somewhere. Are the Chinese willing to lend an additional $800 billion, in return for American I.O.U.s? How about you, friend? Can you spare a billion dollars? At the very least, such borrowing will force up interest rates, making life difficult for businesses and individuals who need to borrow money (say, for mortgages? Hmm.) Printing more money, which is the alternative, is simply inflationary. Debtors with fixed-rate loans make out when inflation is high, but everyone else loses.

3. The money must be repaid somehow. This is a debt that will saddle us with higher taxes for years to come. Maybe that suggests we pay a little more attention to how the money is being used.

4. The long-run impact of additional government spending is likely to be negative. According to the Congressional Budget Office, the rise in government debt would crowd out private investment to the point that, by 2019 – not too far away, ladies and gentlemen – the “stimulus” would reduce GDP by 0.1 to 0.3 percent.

5. In the short run, the spending is likely to produce some gains – but less than the costs. To put it another way, the Keynesian “multiplier” – the increase in GDP from an additional dollar of spending – is almost surely less than one. As Professor Robert Barro notes, anyone who claims that a dollar of additional government spending yields more than a dollar of incremental GDP has to explain why the “stimulus” should be limited to $800 billion. Why not a gablillion dollars, and we’ll all be rich? (Barro’s own research, involving additional spending during wars, yields a multiplier of about 0.8.)

6. There is a tradeoff between spending money quickly and spending it wisely. Supporters of this porcine package point to investments – in infrastructure, such as roads, and in knowledge – that will increase productivity in years to come. Surely some of those claims are true. But returns will not help goose the economy today, so there is no need to rush to spend the money. Furthermore, we should be making (and are making) these investments in the ordinary course of business, as long as the investments pass a cost-benefit test. Instead of doing so, Congress is in an unseemly haste to spend money, like a car salesman trying to get his customer to drive the new car off the lot today.

It’s hard to understand why Americans aren’t screaming with rage at this naked exercise in rent-seeking that will ultimately impoverish us. Part of the answer is that 40% of all adults pay no Federal income tax (a bipartisan bit of foolishness), so they have no direct stake in the future costs of this fiasco. (The indirect costs – higher interest rates, higher inflation, and slower growth – are more abstract and harder to understand, though ultimately more important.) But I suspect the principal reason is that Americans have increasingly come to believe that the government is there to make their lives easier, and it can be done costlessly. Like the child who magically receives money from the Tooth Fairy for no effort beyond falling asleep, the public believes in the Comfort Fairy, who will magically solve their problems while they sleep, leaving behind a low-interest mortgage, cheap gasoline, a high-paying job, free health care, and a generous retirement at age 50. Easier to believe in a woman who leaves a shiny new quarter in exchange for a discarded tooth, but millions apparently do.

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