“Like the great wars of the 20th century, some analysts and historians think the current crisis could fuel a new era of big government in which public officials control more of the levers of the economy.” Those are the words of Wall Street Journal columnists Tom Fairless and Jason Douglas as they seek to divine the post-Coronavirus future.
Their analysis is depressing, and for obvious reasons. While conservatives and liberals (American style) both operate under the pretense that government spending is some kind of abstraction that just happens without consequence, the unhappy truth is that per Fairless and Douglas, every dollar arrogated by politicians to themselves amounts to an extra dollar of governmental control over the economy’s precious resources by Nancy Pelosi, Kevin McCarthy, Chuck Schumer, Mitch McConnell, Donald Trump, and perhaps, Joe Biden.
Though some believe mere mention of government spending is an expression of solidarity with low-growth austerity, the greater truth is that government spending itself is the living definition of austerity. And no, this isn’t a comment about “budget deficits.” To focus on deficits is to waste time. The only number that matters is the total amount of dollars spent by politicians.
In that case, the politicized allocation of precious resources that Fairless and Douglas speculate is our future will naturally limit total growth simply because Pelosi, McCarthy et al are rather unworthy replacements for actual wealth creators. Think Bezos, Thiel, FedEx founder Fred Smith, Blackstone’s Stephen Schwarzman, and countless other innovators and investors. Government spending restrains growth. Period.
And for those who think politicized spending worked during World War II to boost the U.S. economy, please repeat the 1st grade. Governments can only spend insofar as the economic growth has already happened, and will happen. It’s no mere coincidence that the U.S. federal budget is many multiples of Nicaragua’s. Precisely because Americans are quite a bit more productive than Nicaraguans, and precisely because they’re expected to be quite a bit more productive in the future, U.S. politicians can arrogate to themselves present and future wealth always and everywhere created in the private sector.
Looked at in terms of WWII, the economic suffocation that was the New Deal in the 1930s finally ended in the late 1930s. When it did, economic growth in the U.S. started to pick up such that the U.S.’s involvement in the war could be muscular. At the same time, it should be made clear that contrary to what misguided disciples of John Maynard Keynes believe, the maiming, killing and wealth destruction from the war did not boost economic growth. They logically depressed it. Human beings are the drivers of economic progress, yet WWII was all about their extermination. Economic growth enabled war, but growth wasn’t enhanced by that which snuffs out human life.
This rates prominent mention given the certainty that the “battle” against the coronavirus will be billed as some kind of wartime endeavor that requires more government control, and that Fairless and Douglas allude to. Readers shouldn’t be fooled. “Crises” are the state’s oxygen, and what elevates the state, depresses growth.
Oh well, the sad truth is that in response to an economic crack-up of their own making, politicians will seek to expand their anti-progress footprint. Though we won’t be improved by this development, capital will still be plentiful.
Will this be because of the Federal Reserve? All too many will say yes. They too should repeat the 1st grade, or maybe nursery school. How did economic Schools from Keynes to Friedman (the discredited laugh riot that is “monetarism”) to Austrian get it into their heads that a central bank could expand credit? The very idea defies basic common sense.
One guesses the belief in what’s absurd is rooted in a misunderstanding of money. All three Schools in varying ways believe money instigates, and that the creation of “money” is the creation of credit. No. More realistically, money is a consequence of production, and money is a consequence of the happy truth that producers produce in such abundance that they can direct their excess through loans and equity stakes (this is called investment) to others that need it to vivify their own entrepreneurial visions.
It’s sad that what’s so obvious requires stating, but money only has a purpose insofar as there’s production first. Production first, then money. Money enables the rapid circulation of production that’s already happened. In short, central banks produce money, not credit. They can’t alter economic reality, and if they didn’t exist no one would notice other than the economists kicked to the curb by their shuttering. Long before central banks, money existed to circulate real resources, so would money exist without central banks.
So while central banks can’t create credit, the mystical belief that they can hopefully clarifies what credit actually is. Hopefully it’s a reminder that no one borrows dollars; rather they borrow dollars for the resources that those dollars can be exchanged for. Think trucks, tractors, computers, office space, and most crucial of all, labor. At the same time, no one saves or invests dollars; rather they delay acquisition of real market goods in order to acquire more (through an interest rate, or an equity return) down the road.
Stated simply, money is just the measure facilitating the movement of real things. Nothing else. Money is solely a consequence of production, and would exist in abundance sans the state wherever there’s production. It would also be scarce with or without the state wherever production isn’t. Money circulates, nothing else. Get it?
Which raises a question of why credit will be abundant at a time when politicians are spending so much, and central banks are just being their irrelevant selves? The speculation here is that the automation that’s long defined economic progress, and that powerfully defines the present, will prove the necessary creator of abundant credit that central banks can’t, and logically never could be. The same automation will overwhelm attempts by politicians to play principal capital allocator.
Let’s never forget that when we borrow or seek investment, we’re seeking access to real market goods. Robots don’t take vacations, plus they can operate all day and every day. Because they can, the resources that we need in order to live, and innovate with, will become increasingly plentiful at costs that increasingly drop.
No doubt growth would be greater minus all the government waste, but politicians exist to spend. Entrepreneurs will endure them, all the while accessing the resources necessary to innovate around them.
John Tamny is editor of RealClearMarkets, where this article first appeared.