Yesterday, I heard a guy on Michael Campbell’s Money Talks program saying that while a number of economists have spoken out against Government Stimulus packages on the grounds that there is no supporting data, they are still beneficial because they “improve confidence”.
This is a load of crap. He basically is admitting that government stimulus won’t actually help the economy (as I’ve noted previously). But he thinks that the “impression” the government is trying to do something will increase the chances that businesses and people will lend, borrow and spend money and revive the economy. Bollocks!
One of the first problems of Keynesian theory is that it assumes that individuals and businesses decisions will not change even though the government is investing in the economy. The same is true if you believe it’s about confidence. People’s confidence in the economy is based on their belief that they will continue to be employed, or that their business is going to lose or make money. The recession will turn when people and businesses think there are opportunities to once again make profits – and this will happen naturally as prices rise or fall, as competitors fail, or new market opportunities arise. But if the government starts “spending borrowed money”, this can become distorted.
First, some aspects of the market will attempt and succeed in figuring out how to game the government’s largesse, to their own benefit. One of the first groups that will do this are public sector unions, who will demand more of the stimulus for their members. Private sector unions and industries that have created the illusion they are invaluable to the economy (i.e. the carmakers) will also be at the top of the list. And lower levels of government, especially municipal ones, will take credit for “getting their fair share”, even though the projects they will push forward are of dubious economic value.
Second, those businesses and individuals that would naturally try to find opportunity in the depths of a recession will be extra careful in doing so, because the government may intrude into their market and destroy their opportunities with little or no warning. If you find an opportunity but the government suddenly hands your competitor a hand up because they were better lobbiests (rather than actually competing), then why should I risk my meagre capital? In this way, government stimulus could lengthen the downturn.
Finally, the problem with deficit spending to fund the stimulus is that it places an additional burden on the future taxpayers. Even if the downturn is short, it may be very difficult for the government to rebalance the books, and therefore taxes will need to rise (thus draining real economic growth some more), or government spending will fall (which might not be a bad thing). However, in any case it means more of the future economic growth will go to paying off the stimulus of the previous recession. And if the stimulus had little, no or negative impact on the economy, mortgaging the future will have been done for nothing.
Government should stay out of spending money in the economy where at all possible. And this is one of those times.