The Government’s War on Recession

Liberal theory teaches that one truism of government is that whatever it does, the results end up making the problem not better but worse. I’m thinking of the war on drugs, the war on poverty, the war on illiteracy, and the war on terror. So it is with the war on recession. Already it has given us a record of failure, not just for the most recent year but really dating back to the 1930s.

A hundred years ago, liberal theory warned against the central bank on grounds that it would create inflation and generate instability and political corruption. All that happened. Liberals warned against the attack on the gold standard in the 1930s, and were proven right again. So it was for Bretton Woods and also for Nixon’s final creation of unbacked currency. They were right again.

But do Obamites learn from history? On the contrary, they are completely blind to it.

Intellectual failure is at the root of the problem. Note how the administration invokes economic theory in defense of its policy of wholesale national looting. In this case, bad economic theory works as a cover for acts of despotism. In the end, this is how the theoretical errors of J.M. Keynes end up having utility for governments.

But one aspect of this has not received enough comment. It concerns how the state is using the excuse of stimulus to help not society but itself. The state is certainly being stimulated here, but the private economy — the only real source of social wealth — is being drained in many ways.

The most direct way in which stimulus is helping the state is by transferring resources from the private economy to the state itself in a zero-sum game. From Moody’s comes direct evidence. While the rest of the nation’s economy is shrinking, the economy of Washington, DC, is growing at a 2.5% pace. Northern Virginia and suburban Maryland are sharing in the glee, as government gains at the expense of everything else.

One of the great lessons of liberal theory concerns the extraordinary capacity of free exchange to create wealth. Trading makes both parties better off. Saving makes resources available for investment. Investment creates jobs that yield more products for people to purchase. Through this mechanism, the West grew rich.

The economics of stimulus are not as complicated. They amount to taking from some and giving to others. There is no wealth creation at all. There is no magic “multiplier” to turn stones into bread. The economics of stimulus is value destroying, because property is pried loose from owners, who put it to socially useful purposes, and given to government so it can pass it out to friends.

This process is costly to overall wealth production — and most of those costs are unseen. We will never know what kind of real stimulus could have taken place had the property been left in private hands. What jobs might have been created, what investments might have been made, what kind of business expansions might have taken place? We will never know.