The Return of Carterism

Posted: August 4, 2009 in Economics

Many people are beginning to understand what’s wrong with welfare-state liberalism.  It costs money.  They look at the huge federal deficit, and the near-bankruptcy of California, and realize that we can’t just spend our way into prosperity.

Think of a guy who buys lots of stuff and looks to all the world like he’s prosperous.  Only he got that way by maxing out his credit card.  Is he really prosperous?  Most of us would say no, for no matter how little we may understand about economic theory, we do realize that when we max out a credit card, we have to pay it back someday.

When government spends money on bailouts and “stimulus” packages, it’s doing essentially the same thing — maxing out its credit card.  The day of reckoning has to come at some point.  We normally pay off our own cards by painful savings, or in worse cases, make use of credit counseling, or go bankrupt.

Government has two ways of paying off its credit card:  taxes or inflation.  Raising taxes is politically difficult, and a pretty stupid thing to do during a recession.  Taxes depress economic activity which is not the result you want during a recession.  Inflation has been the preferred way government pays off its debts — supported by an economic theory known as Keynesianism.

By inflation, government creates money out of thin air.  Things are economically valuable when they’re rare, and when they aren’t, they lose economic value.  Air is one of our most valuable resources, but it has no economic value.  Why?  Because it is too abundant.  (Pressurized oxygen is another matter.)  Nobody would pay anything for air in its native state.  Have you ever tried to sell air for a nickel?

Money is like that too.  If it’s rare it’s more valuable and if it’s not rare, it’s less valuable.  When government creates money out of thin air and pumps too much of it into the economy, each individual unit of money is less rare and therefore less valuable.  In practical terms, it means higher prices. 

Government has all too often been willing to use inflation as a way of paying off its maxed out credit card, but it’s as harmful to the economy as private counterfeiting is, or as harmful as enemy counterfeiting is during wartime. 

The problem with Keynesianism, or new Keynesianism, is that it believes in effect that you can create prosperity by maxing out your credit cards.  Think of all the wonderful things you can buy now!  Don’t worry about tomorrow.  In the long run, say the Keynesian inflationists, we’re all dead anyway.

If you say, how can I be prosperous if I’m up to my eyeballs in debt, inflationists will answer that “inflation is your friend.”  Since the money is worth less after inflation, your real debt is actually less than your nominal debt, the debt recorded in your books.

Isn’t that a way of robbing from lenders since they will be paid back in less valuable money?  Not to worry, we’ll just lend the lenders some more money.  And yes, it will seem like there’s prosperity all around because of all the lending and money that’s available.  But something deep down tells you it’s an illusion.

It’s an illusion because the money is actually worth less than it was before.  It’s only a nominal prosperity, so to speak, not a real one.  And nominal prosperity is what politicians love, since they can parcel the new money out to their favorite voting blocks.

These voting blocks are happiest because they get access to the new money before it loses its value, while later on old people or people on fixed incomes suffer the loss of their purchasing power.

Then when stagflation finally arrives, you are lectured by inflationists about a crisis of confidence, about losing faith, about worshipping self-indulgence and consumption, and about the need for windfall profits taxes and import restrictions, etc.

You see, it’s not government’s fault that we’re in this mess.  It’s our fault really, for we are the ones who have caused all this malaise.  At least that is what inflationists will tell you.

Recently, we’ve heard talk of a second stimulus bill.  But what would you think of a man if he decided to buy even more cool stuff by maxing out another credit card.  That’s essentially what we have with the idea of a second stimulus bill.

Perhaps the American people will someday realize that they need to think before they vote.


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