Stimulus Delusions

Media reports on the Obama stimulus package have been euphoric to say the least. Sometimes I think I’m reading or hearing about an economic miracle of epic proportions–you know, something akin to the manna God provided the Israelites during their 40-year journey to the Promised Land. But then I come to my senses and remember that manna was a net addition to the Israelites’ food supply. It was not pilfered from a subset of the Israelites to be “given” to their compatriots.

Not so for Obama stimulus dollars. All the dollars, and then some, will be taken (that is, confiscated) from Americans. Does it matter whether the dollars come from taxes, government borrowing, or the government’s printing press?

Not at all. These are just three of the ways governments confiscate private wealth. Income, sales, and myriad other taxes forcibly tap the government into the gains that buyers and sellers reap from goods and services flowing through the marketplace. Exchanges for which the tax wedge exceeds these gains don’t occur—the power to tax really is the power to destroy. Lost exchanges don’t yield any tax revenue, but their disappearance still harms buyers and sellers. Economists call this “deadweight loss.”

More problematic, at least for some, is the fact that government borrowing also confiscates private wealth. It’s problematic because, on the surface at least, no one forces people to lend to the U.S. government. But its ability to borrow hinges ultimately on its ability to repay at some future time. How? By levying future taxes. Government borrowing is delayed tax confiscation.

The inflation that results when the government fires up its printing presses to finance its spending initiatives also confiscates private wealth. In this case government taxes peoples’ desire to hold/use money. For example, suppose I want to maintain a money cushion equal to $1,000 of goods and services at current prices. A 10 percent inflation confiscates $100 of that cushion just as surely as if Uncle Sam snatched $100 out of my wallet. Economists call confiscating private monetary wealth via inflation “seigniorage.”

Changing Incentives

So am I saying the Obama stimulus initiatives merely reshuffle the economic deck–to wit, some people get more, others less, and that’s the end of the story? Nope. To think the story stops here is perhaps less delusional than the euphoria mentioned at the outset, but there’s more to the story, and it’s not pretty.

Confiscating private wealth—be it current production, future production, or money itself–reduces peoples’ incentive to generate wealth. Hey, when Robin Hood stole from people going through Sherwood Forest, fewer people made the trip. This means people pay twice for the stimulus initiatives: once when they pay taxes on exchanges that continue despite the confiscation and a second time when otherwise productive exchanges are eliminated. In other words, what the government spends costs people more than their tax payments.

Some diehards might be thinking, “Whoa, professor, you’re ignoring what Uncle Sam buys with those stimulus initiatives.” Am I? There are things that are best done collectively—things that would not otherwise have been produced, such as national defense and secure private property rights. But one would have to suffer from yet more delusions to think that such goods and services are what the stimulus initiatives are about. Indeed, the concomitant wealth confiscations are the polar opposite of securing private property rights.

Milton Friedman once noted that spending someone else’s income for the benefit of someone else dulls one’s incentives to be concerned about how the money is spent—in terms of how much and on what. So whatever the twofold dollar cost of stimulus initiatives, it follows that one should be skeptical about the usefulness of what ends up on our collective plates. It’s likely to be a smaller bang for a bigger buck.

What a deal, huh?Yes, if you’re delusional