The “stimulus” package is based on the Keynesian premise that spending creates wealth. In reality, however, only production creates wealth; spending merely transfers it. Goods are created when matter is physically altered, and wealth–as opposed to goods no one wants or needs–requires that what is produced by those alterations is actually valued by consumers. Keynesian economics holds that government spending can create wealth when factors of production are idle–that is, when people are out of work and factories have unused capacity. The Keynesian reasoning is that if unemployed people were working and factories’ idle machinery was put to use, more goods would be created. While this is certainly true, the Keynesians completely overlook the fact that there is a reason why those factors of production are idle, and it isn’t that everyone except government officials following Keynesian economics have lost their minds. Increasing the material output of goods is only productive in terms of the creation of genuine wealth if consumers are willing to pay a price for those goods that is higher than the manufacturer’s cost of producing them. The idea of the “stimulus” gimmick is to trick both sides of transactions into thinking that this is the case when it isn’t: first, trick consumers into thinking they can afford to buy more than they really can; then, trick producers into thinking they are making a profit from their sales (to people who can’t afford the goods in the first place) without realizing they are actually producing at a loss. The result of this is that the material output of goods will, in fact, increase, while the creation of wealth–what actually matters–suffers.
On the demand side: Right now I am trying to spend less because I can’t afford as much as I could (or rather, as much as I was fooled by inflation into thinking I could) before the crisis. The Keynesian response to this is to cause yet more inflation–to give me paper money printed out of thin air in order to fool me into thinking once again that I can afford to purchase more than I actually can. On the supply side: car manufacturers have left their machinery idle, because they have judged that they can’t make a profit by using them to produce more cars. The Keynesian response to this is once again yet more inflation; give them paper money printed out of thin air in order to fool them into thinking they are making a profit when they really aren’t, thus tricking them into producing more cars.
This double-fakery does not produce any new wealth. It does not make anyone more prosperous, although it does temporarily create the illusion of doing so by causing a nominal increase in everyone’s revenues. Once the inflation caused by the process sets in, however, this illusion of prosperity disappears–and it becomes obvious that the scheme has accomplished nothing but to squander everyone’s real wealth. Consumers can’t really afford to buy new cars, even though the scheme fools them into thinking they can because their incomes have risen in nominal terms; and likewise, car manufacturers aren’t making higher profits in real terms than they were before, even though the scheme fools into thinking so because their profits have risen in nominal terms. Consumers are deceived into making purchases that they can’t actually afford, and producers are deceived into producing at a loss. As the newly printed dollars circulate through the economy, the cost of living and the costs of production begin to rise: and once this effect inevitably sets in, the fact that no one has actually been made more prosperous by the Keynesian scheme becomes obvious.
It is important to recognize that wealth is a subjective term–that is, it is relative to the scale of values of the individual concerned. Suppose for example that my scale of values is such that even though I would like to stay in my current apartment and purchase both a new computer and a new TV, after I pay my rent I can only afford one or the other. AndI would consider myself more prosperous living in my current apartment with only a new computer than I would moving into a smaller apartment so that I could afford both a new computer and a new TV.
Thus, my scale of values looks as follows:
1. Current apartment; new computer; new TV.
2. Current apartment; new computer.
3. Smaller apartment; new computer; new TV.
After the “stimulus” puts inflated currency into my pockets, I am fooled into thinking that I can actually afford to stay in my current apartment and buy both a new computer and a new TV. So I do so, thinking that the Keynesian scheme has made me more prosperous, because I think I can now afford to stay at position 1 on my scale of values instead of position 2. But eventually, inflation sets in; prices begin to rise, and I find that I can no longer afford to pay my rent–so I have to pack up my new TV and computer and move into a smaller apartment. I am now on position 3 of my scale of values instead of position 2. Had the “stimulus” not hoodwinked me into thinking that I could afford both a new computer and a new TV when I really couldn’t, I would’ve purchased only the new computer, and I would have remained able to afford the rent on my old apartment–thereby remaining as prosperous on my own personal scale of values as I possibly could given my real income. I would have remained on position 2, which is all that my real wealth allows me to sustain. But because I was tricked by the Keynesian scheme into buying both the TV and the computer, I am now positioned lower on my own scale of values than I would have been otherwise–I am now at position 3. I am less prosperous. Thus the scheme temporarily fooled me into thinking that I was at position 1, and then dropped me down to position 3, when in the absence of the scheme I could have simply remained at position 2. Of course, in reality the effects of the scheme are not so simple and clear cut. On the basis of a given nominal salary, an individual typically sustains a higher level of consumption–more eating out, golfing, going out to movies, and so on–than he would have had inflation not made him think he had more money than he really did; and in the end the individual is made less prosperous by this process without even retaining anything tangible in the end, in the way that I at least retained my new TV and computer at the end of this example. So, I use this particular example even though it is slightly unrealistic to show that even if individuals retain wealth after the effects of this scheme have run their course, they are still left worse off in the end than they otherwise would have been. These same principles apply to businesses, as well. If they are deceived by the “stimulus” into putting their idle machinery to use, they end up worse off in the end than they would have been otherwise. Just as my rent payment rose due to inflation, so too do business’ costs of production begin rising, as well as the interest payments on their loans. In the end, even if the scheme does accomplish its goal of increasing the material output of goods, wealth has merely been squandered, leaving everyone less prosperous than they otherwise would have been.
Another important point which Keynesians completely ignore by advocating this double-fakery scheme as a response to consumers saving their incomes instead of spending it is that savings actually do eventually get spent. The critical question is of the nature of the spending that is done–is money being spent on production, or consumption? As far as the creation of new wealth is concerned, money that is spent on consumption is a dead end; it represents no net benefit to society. You buy bread; you eat it. The bread is gone, and there is nothing left to show for it. But if you invest the money, it is spent on production–say, to pay wages to the bakery’s employees, who use it to buy bread for themselves. Money is spent to buy bread that is ultimately eaten in both cases; the question is whether it goes towards feeding a worker who is making more bread than he eats (he is being hired at a profit, and spending less than his income), therefore representing a net gain to society–or whether it goes towards bread that is simply consumed, therefore representing no net gain to society. To be clear, there is nothing wrong with consumption–we produce things, after all, because we want to consume them. But Keynesian policies are premised on the absurd notion that savings are simply “stuffed under a mattress” without being spent, when in reality most savings are invested in future production and therefore represent a beneficial and desirable contribution to the economy. Thus the “stimulus” does not only squander wealth and leave everyone off less prosperous than before, it does so at the expense of savings and investment that would have benefitted the economy had the “stimulus” scheme not squandered that wealth.
This crisis was created by too much consumption, too much debt, and malinvestment. What is needed for recovery is not for the delusion created by a “stimulus” to fake consumers into thinking that their incomes are higher than they really are while faking producers into thinking that they are producing at a profit when they aren’t–but for the economy to be allowed to readjust to external reality. Most crucially, this means allowing the liquidation of malinvestments businesses were fooled by prior inflation into thinking they could afford. Encouraging more inflation in order to retain the illusion that those investments still represent a profitable allocation of capital is the exact opposite of recovery; in fact, it is an expansion of the very thing that created the problem to begin with–and it will accomplish nothing except to make the corrections and readjustments to reality that inevitably must occur in some form another more painful than they would otherwise have to be. Liquidation, the single most important ingredient in the recovery and readjustment to reality of an economy hampered by inflation, is the very thing that a “stimulus” package prevents.
Although the purpose of a bankruptcy proceeding is to allow creditors to collect as much of the money they are owed by a bankrupt company as possible, debtors benefit from bankruptcy proceedings as well, because after they pay off the part of their debt they are able to, what is left over is extinguished and they are allowed to go on with their lives. In a bankrupcty proceeding, creditors decide in collaboration with a bankruptcy court whether it is better to shut the bankrupt business down and liquidate its investments, or continue its operation under new and more efficient management. Creditors have greater financial incentives than anyone else to insure that the decision they make will maximize the long-term prosperity of everyone involved. Thus, if they judge that the business can still make a profit under better management (indicating that it is a productive allocation of society’s scare capital and labor), they will decide to have the business taken over by more efficient management. Only if they judge that the business can not continue to make a profit (and therefore is not a productive allocation of society’s scare capital and labor) will they decide that it is better for the bankrupt business to shut down and liquidate its investments. This process removes capital and labor from businesses which are managing them poorly and redirects them to businesses which are efficiently using them to satisfy consumers. This allows the labor and capital structures of society to be redrawn in alignment with the wants and needs of consumers–that is, in alignment with external reality. The only thing that interference in this process can accomplish is to allocate capital and labor less efficiently than otherwise, in a way that is not best suited to fulfilling the desires of consumers–thereby making the economy’s inevitable and necessary readjustment to external reality that much more prolonged and painful.
An economy in which rapid bankrupcty proceedings are practiced is one which is predominated by growing businesses, since incompetent businesses are stamped out, their labor and capital reallocated to businesses that are satisfying more consumers and can therefore make better use of them. Hence, even if particular workers are occasionally displaced by a bankrupcty, workers as a whole benefit greatly from the existence of an economy in which bankrupcty proceedings are practiced. Everyone else benefits because the process removes capital and labor from those who are mismanaging them, and puts them in the hands of those judged by creditors as most capable of putting them to productive use satisfying consumers.
It is counter-productive, wasteful, and immoral for any government to ever try to prevent bankrupcties. Bailouts deny the legitimate right of the creditors to collect what they are owed by the bankrupt company. To force innocent third parties to pay for a bankruptcy company’s failure represents a vile form of corporatism; it allows companies poorly managing capital and labor to stay in control of society’s scarce resources, and lowers the prosperity of the entire society as a whole. The institution of bankruptcy is an essential feature of a just and prosperous society, and it is most needed as a readjustment to the capital structure of society after the government has created misallocations of capital by increasing the money supply. Bailouts and “stimulus” packages are thus not only unjust and immoral, they represent a continuation of the very practices that caused the problem to begin with.