Dublin's economy could teach U.S.That's the Title of the NJ Star-Ledger's July 1, 2010 editorial imploring us to learn the lessons of the Irish government's attempt to pull that nation out of a recession. The Editorial Board writes:
"The Irish didn’t hesitate. In a let’s-get-this-over-with-quickly move, they slashed public spending and raised taxes, the standard recovery recipe of deficit hawks at the International Monetary Fund. The result? Even worse economic shrinkage."Who knows what the complexities of the Irish economy are. Since the SL is in agreement with the Irish that taxes should go up, they've narrowed down the differences between the two countries to one of government spending. Now, there is no doubt that, when government spending consumes a quarter to a third (or more) of the nations economic output, changes in its budget expendatures are bound to have an effect on the economy. The Editors believe more government spending is the answer, because:
"[S]timulating the economy is the immediate problem and, inevitably, a key to dealing with the debt and deficits. Macroeconomists can lecture learnedly on the depressed housing and industrial real estate markets as a drag on the economy, but the heart of the economy is consumer spending — two-thirds of the economy in fact."But, whatever the short-term economic effects of government spending cuts vs. juiced-up "stimulus" spending, the fact remains that human beings must produce the things they consume. Look around your house, or the local department of grocery store, and ask yourself if those thousands upon thousands of shelf items just materialize out of nothing. No, they didn't. Human beings produced them. Another fact is that government, by its very nature, produces nothing.
So-called government "stimulus packages" have never worked, and in fact hurt the economy. I've left the following comments, to briefly explain why that is and
necessarily has to be the case.
zemack July 01, 2010 at 4:20PM
Follow
Rather than the Editors of the Star-Ledger, who believe you can spend and consume your way to prosperity, I’d rather turn to some true economic experts to understand what’s needed to generate economic growth.
Gilligan … the Skipper too … the millionaire, and his wife … the movie star … the professor and Mary Ann: Remember them? They all knew better. When the SS Minnow ship-wrecked on that uninhabited island off of Hawaii in 1964, I don’t recall the hapless crew’s first thoughts being: Let’s see, how can we create food and shelter out of nothing, without any effort on our part?
I don’t recall the wealthy passenger Thurston B. Howell, III passing out stimulus checks to his fellow travelers so that they could rush out and spend their way to a vibrant Gilligan’s Island economy.
They understood that before consumption, you must have production. They understood that to have production, you need real people doing real thinking and real labor. And, that’s what they did. That silly little 1960s sitcom that as a teenager I loved so much was way to serious a show to allow the writers to run an episode that portrayed Mr. Howell assuming the role of banker, and telling everyone: “Stand still, and watch my millions shower you with prosperity!” It would have failed after one episode.
They did pretty well on that island, that rag tag group of economic experts. They worked. They had to. But suppose, in one episode, a looting gang of primitive savages invaded the island and began seizing their clothes, food, building materials, hunting weapons, etc., as well as their seed corn (their savings) that was set aside to plant the next harvest? Suppose those savages simply began consuming the stuff created by the ingenuity and hard work of the Gilligan Islanders? Would that have left the shipwrecked crew and passengers more prosperous, or poorer? Now you know why all attempts to stimulate “demand” through government spending always must fail, if prosperity rather than central planning is the goal. Those savages would have created plenty of “demand”, just like our president wants to do with government money.
What the stimulus champions ignore is the crucial difference between private and government “demand”. They stare blankly at statistics that allegedly show that “the heart of the economy is consumer spending”. But all they see is spending – money changing hands at the cash register. They gape at mid-stream, and miss the linkage between money and work. Consumer spending is not a transaction between a consumer and a producer. It is a trade between two producers.
As any honest “consumer” knows, you need to earn some money before you go to the store. Money must be made, before it can be spent. Every time the federal government creates another program to stimulate demand, it does so – like the savage - by seizing the earnings and savings of the nation’s productive through taxation, deficit spending, or printing press money. Private consumers work for the money they spend, thus creating their own demand. Politicians – from liberals like Obama and to conservatives like Bush – simply steal it. The source of consumer spending is productive work. The source of government spending is economic plunder.
Gilligan’s Island is a monument to economic common sense compared with much of what comes out of Washington and the academic ivory towers today. The best advice I can give to the Editors is, watch some Gilligan’s Island reruns. What’s needed is production, if “consumer demand” is the goal. Rein in the imperial bureaucracy (cut regulations), and liberate producers with massive spending and tax cuts. In other words, get the looting savages off of the island!
Oh, and one more thing. That looting band of savages that invaded Gilligan’s Island? Their leader had a name. You might recognize it. His name was Chief John Maynard Keynes.
There's more to it that I could go into. For a more in depth study of this subject, see George Reisman,
Economic Recovery Requires Capital Accumulation, Not Government "Stimulus Packages" and
Production versus Consumption
