Ever since the Keynesian revolution, standard wisdom among economists (and most of the population) has been that federal spending stimulates economic growth. Why, it’s a “free lunch” — money gushes into the hands of people thanks to kindly old Uncle Sam. They can buy more and that makes producers produce more. Who could possibly object?
On his Cafe Hayek blog today, Professor Don Boudreaux explains why that line of thinking is disastrously wrong.
He begins by observing that resources are scarce. When labor, capital, or raw materials are employed to make one thing, they can’t be employed to make something else.
Then he continues:
When people spend their own money, they have strong incentives to use resources in ways that generate satisfactions that exceed their costs. When people spend other people’s money, they have strong incentives to use resources in ways that give the greatest possible satisfaction to the spenders, but with little or no regard to the satisfactions thereby denied to those persons whose money is spent – that is, those persons whose real resources are taken from them. When people spend other people’s money, in short, resources are used wastefully from the perspective of everyone in society other than the lucky ones who get to spend other people’s money.
Therefore, government spending entails shifting resources away from market-driven uses, where the prospect of losses compels people to think carefully and change if they see that they’ve made a mistake, and into politically-driven uses. Politicians don’t calculate profit and loss, but rather vote-buying possibilities. That means that labor, capital, and raw materials go into things that curry favor with voters and interest groups, not into things that produce goods and services that pass the test of the market.
Boudreaux’s conclusion:
Many people suppose that deficit financing is a source of free lunches, an economic perpetual-motion machine or fountain of youth. (People who fall for this fallacy typically do so because they forget about, or ignore, the fact that deficit financing results in reallocations of real resources.) In reality, deficit financing is not only not a source of free lunches, it’s a source of wasteful orgiastic feasts. It allows today’s citizens-taxpayers-politicians to gorge and intoxicate themselves at the expense of tomorrow’s citizens-taxpayers. Deficit financing is little short of a scam.
The bigger the government gets, the more it absorbs resources that would have been used productively, but will now be put to uses that please politicians and make them look good. The losses are unseen, but real.