A Case Against Government Stimulus Spending

A typical mainstream assessment of the health of the economy involves an analysis of the most recent gross domestic product (GDP) figures. And with third-quarter GDP in Canada only slightly more than one-fifth that of the United States, our national Keynesian witchdoctors are paging code blue:

Canadians have been patting themselves on the back in recent years over the country’s economic resilience in the wake of the financial crisis, but if recent data is anything to go by, our days of economic supremacy may be numbered.

Canada’s economy grew at slightly more than one-fifth the pace of the U.S. economy in the third quarter of 2012, according to data from StatsCan and the U.S. Bureau of Labor Statistics. While Canada’s growth amounted to 0.6 per cent at annualized pace, the U.S. saw GDP growth of 2.7 per cent in the same period, according to recently revised figures.

“Canada (and its central banker) got a lot of accolades by leading the pack out of recession, but there’s little reason for back-patting in the evident slowdown taking hold this year,” CIBC economist Avery Shenfeld wrote in a note to clients.

How bad is it? According to conventional wisdom, it is this bad:

Notwithstanding the essential meaninglessness of the GDP statistic, let’s focus on one of the consequences of such anaemic GDP growth: inevitable calls for government stimulus spending. It is coming. Batten down the hatches.

We are told that low GDP growth is indicative of a sputtering economy. Plus, government spending is counted toward GDP.  “Why not,” the Keynesian asks, “cure our economic ills by having the federal government goose the economy with various economic spending action plans?”

Not so fast. First of all, it should be obvious that not all spending improves the well-being of individuals. This is especially true if the spending in question results in capital consumption. As economist Robert P. Murphy, adjunct scholar of the Mises Institute, explains:

In the classic example, suppose the government spends the money paying workers to dig ditches and then fill them back up. Clearly, in this scenario there would be nothing to show for the government expenditure.

In fact, the economy as a whole would be poorer, to the extent that the workers would have preferred leisure to digging ditches. If the workers voluntarily accept the ditch-digging job, then the goods they buy with their paychecks must have been redistributed from others, who are now poorer because of the taxes or deficits used to pay the government employees. After all, digging ditches doesn’t create more goods to go around.

While such boondoggles are helpful to illustrate a point, they risk missing the bigger picture. Namely, the harm inflicted on society by all government spending.

In private business, firms generate profits or are dealt losses through voluntary transactions with willing consumers. They participate in markets for their goods and/or services and engage in economic calculation.

On the other hand, government does no such thing. Hans-Hermann Hoppe, in his book Democracy: The God That Failed, elaborates:

No one buys government “goods” or “services.” They are produced, and costs are incurred to produce them, but they are not sold and bought. On the one hand, this implies that it is impossible to determine their value and find out whether or not this value justifies their costs. Because no one buys them, no one actually demonstrates that he considers government goods and services worth their costs, and indeed, whether or not anyone attaches any value to them at all.

According to Hoppe, this reality should compel us to reconsider altogether the role government spending plays in national income accounting and statistics such as the GDP:

From the viewpoint of economic theory, it is thus entirely illegitimate to assume, as is always done in national income accounting, that government goods and services are worth what it costs to produce them, and then to simply add this value to that of the “normal,” privately produced (bought and sold) goods and services to arrive at gross domestic (or national) product, for instance. It might as well be assumed that government goods and services are worth nothing, or even that they are not “goods” at all but “bads,” and hence, that the costs of politicians and the entire civil service should be subtracted from the total value of privately produced goods and services. Indeed, to assume this would be far more justified. For on the other hand, as to its practical implications, the subsidizing of politicians and civil servants amounts to a subsidy to “produce” with little or no regard for the well-being of one’s alleged consumers, and with much or sole regard instead for the well-being of the “producers,” i.e., the politicians and civil servants. Their salaries remain the same, whether their output satisfies consumers or not. Accordingly, as a result of the expansion of “public” sector employment, there will be increasing laziness, carelessness, incompetence, disservice, maltreatment, waste, and even destruction – and at the same time ever more arrogance, demagoguery, and lies (“we work for the public good”).

Our politicians get re-elected by playing Santa Claus without the naughty list. They embrace the pseudo-intellectual cover of Keynesianism because it openly advocates government spending in the face of crippling debt. Fiscal policy decisions made in light of depressed GDP figures perpetuate the problem.

At the moment, Finance Minister Jim Flaherty is publicly resisting calls for stimulus spending:

In a letter to opposition MPs issued Thursday, the finance minister said he was in no mood to receive suggestions that he should increase spending or raise taxes.

“I will continue to stand against costly, new spending initiatives that would increase the size of government and throw Canada off track for balanced budgets,” he said.

So far so good. Let’s hope he sticks to the script.

One Response to “A Case Against Government Stimulus Spending”

  1. george says:

    I haven't heard any discussion by the economists or politicians about the tidal wave of debt that is engulfing Canada.

    The following information is from a Statistics Canada credit market summary data table as of the end of June 2012: (The debt statistics for Canada up to the end of September 2012 will be released in about 2 weeks by Statistics Canada).

    Total debt in Canada as of the end of June 2012 (bottom line of the data table) was 5.1 Trillion $

    From the end of June 2011 to the end of June 2012 the total debt in Canada increased by 209 Billion $.

    For that 12 month period the total debt in Canada increased at a rate of 572 Million $ per day.

    I would have to agree with Karl Denninger when he said (a few years ago) "You cannot expand credit at a rate faster than GDP forever without suffering a financial panic and collapse".

    http://www5.statcan.gc.ca/cansim/pick-choisir?lan

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