Why a Government Can't "Stimulate" an Economy

The economy is shaping up to be a key issue in the 2012 elections, and President Obama and his supporters are crediting his economic “stimulus” policies for "saving the economy." But the question one must ask is: Is it even possible for the government to actually stimulate the economy?

Statistically--that is to say, as measured by GDP--the economy has been growing, albeit weakly, for over two years. That the economy would eventually have "recovered" from the “Great Recession” was never in question. As long as some level of economic freedom - battered and bruised as it has been under Obama - remained, some type of recovery was inevitable. The reason is that, to the extent that the individual is free to act on his own judgement, the economy has a natural tendency to grow, because the root of economic growth is human nature itself.

As Ayn Rand has observed, "Life is a process of self-sustaining and self-generated action. If an organism fails in that action, it dies...” Man cannot escape that fundamental truth. Man must engage in intelligent action in order to sustain his life. He must produce and trade for the goods and services his life depends upon, from basic necessities such as food and clothing to the products required for a flourishing happy life such as movies and golf clubs. The inescapable alternative to intelligent action is poverty and ultimately death.

But in order to act to sustain his life, man must be free to act. Since man's basic means of survival is his reasoning mind, and since the mind is an exclusive attribute of the individual, this means that individual man must be free to act. Indeed, as history has shown, economies flourish only to the extent governments refrain from hindering individual freedom of action. It logically follows that the only form of "stimulus" any government can in fact provide for the economy is to protect individual rights, including rights to property and trade. Given the necessity of the freedom man’s nature requires, the idea that government can stimulate productive action through spending financed by forced confiscation of private wealth, not to mention the ever-growing regulatory shackles on productive individuals and businesses, is absurd on its face. This is why critics of government fiscal and/or monetary “stimulus” policies such as Peter Schiff are right, despite the apparent economic recovery.

To the extent that the economy is undergoing real growth, it is in spite of, not because of, Obama’s policies. Whatever real growth we now have is a testament to the perseverance of productive people struggling against Obama’s rampaging regulatory redistributionism; and to the remnants of economic freedom America still has. Real economic stimulus is rooted in the characters of responsible people who understand, on some level, that life requires self-generated, self-chosen, self-directed action. Thus, as Yaron Brook has observed, “Production does not need stimulation from government; it needs liberation from the government.” Man’s natural stimulus, the will to live, will do the rest.

How does the "will to live" translate into what we call "the economy"?

An economy, in essence, is individuals freely and voluntarily producing and trading products and services; i.e., taking self-generated action in order to sustain one's life. In a modern money exchange economy, an individual works to produce a good or service that is of value to others, who willingly purchase it with money received from still others who trade their money for his work product, and so on in an ever-expanding universe of wealth production.

Prosperity grows whenever some individual realizes a new idea - a new product; a new service; a cheaper, more efficient way to produce an existing product or service, etc. An individual decides to strike out on his own; a business is born. He finds that his intellectual energy and ambition exceeds his own physical capacity to realize his ambitions, leading him to hire one (or more) individuals; a job is born. Factors such as the willingness to take a risk on the new; to invest time, effort, and savings; to act on one’s own judgement; to forgo immediate gratification in favor of some long-term goal; to forge ahead with no guarantee of success are all hallmarks of the most successful individual producers.

The process expands exponentially, encompassing more and more millions of people in more and more occupations – “workers”, professionals, entrepreneurs, investors, businessmen, artists, writers, inventors, et al. But beneath all of the complexities of a modern industrial economy lies the basic dynamic of individual production and trade. And underpinning that dynamic lies a basic, inescapable truth that every honorable individual, rich or poor, understands and respects: work comes before money.

But what happens when the government decides to “stimulate” the economy? Basically, there are two types of stimulus; fiscal (government spending) and monetary (inflation). Bush’s 2008 program (remember those $1200 checks?) and Obama’s signature 2009 package are examples of fiscal stimulus. The government seeks to stimulate “demand” by flooding the economy with money in one form or another. “Where does the money come from?” is the question always evaded by the stimulators. (For a good discussion of the fallacy behind stimulus economics, see George Reisman, Production versus Consumption)

Unlike the private economy--where, except for criminals, people work for their money--the government produces nothing. Instead, it takes from productive individuals – though not as honestly and openly as the criminal – in three ways: direct taxation; borrowing, which is future taxation; and the most deceitful way of all, inflation.

Inflation is the artificial expansion of the money supply; that is, money creation backed not by productive work, but by … nothing! Inflationary money is essentially counterfeit paper. An example of this type of stimulus is Bernanke’s “Quantitative Easing,” or “QE.” But this phony money creates artificial “demand” for real goods and services. Due to the inexorable law of supply and demand, inflation-created "demand" leads to rising prices in some sector of the economy, sooner or later. (For a thorough examination of the nature of inflation, see Ayn Rand, Egalitarianism and Inflation, in Philosophy, Who Needs It?)

But government cannot in fact create demand, because it produces nothing. Say’s Law is absolute: Only supply can create demand – work comes before money. The only things that inflation can in fact stimulate are temporary financial distortions, such as the recent housing bubble. There is no free lunch in nature, or in economics. (This is why bubbles always burst, with devastating consequences. You can’t have your stimulus, and eat it too.) The artificial demand created by inflation comes out of the earnings of productive individuals in the form of a reduction in the value of their money as manifested by the rising prices. Put simply, inflation is a tax, not on your dollars, but on your purchasing power.

Whether fiscal or monetary, stimulus programs are nothing more than a massive redistribution of existing demand – i.e., of wealth. The difference between government and private spending could not be more stark: Private “consumers” work for the money they spend, thus producing their own demand. Stimulus politicians – from liberals like Obama to pseudo-conservatives like Bush – do not and can not create demand. They simply steal it. The source of consumer spending is productive work. The source of government “demand-side” stimulus policies is economic plunder.

The whole idea that the government can stimulate the economy through fiscal and monetary manipulation is a monumental fraud. As history has shown, economies flourish only to the extent governments refrain from hindering economic activity. Stimulus policies, just like economic regulation, are a hindrance, and nothing more. It logically follows that the only form of "stimulus" any government can in fact provide for the economy is to protect individual rights, including rights to property, contract, and trade, which includes laws against fraud, extortion, breech-of-contract, etc. Translated into concrete terms, this means embarking on a massive, systematic reduction in government spending, taxation, and regulation, until full laissez-faire capitalism as been achieved.

The government can do nothing except to let the economy roll, or hinder it. It should let the economy roll.

For more, see:

OBushonomics vs. Gilliganomics

Time to Minimize "Macroeconomics"