Fiscal-monetary ‘stimulus’ is depressive
Politicians, policy wonks and pundits like to classify as economic “stimulus” the $6 trillion in recent deficit spending and Federal Reserve money creation. But subsidies for the jobless, bailouts of the illiquid and pork for cronies are purely political schemes — and they depress the economy.
What is the case for “stimulus”? Many economists believe public spending and money issuance create wealth or purchasing power. Not so. Our only means of obtaining real goods and services is from wealth creation — production. Under barter no one comes to market expecting to buy stuff without also offering stuff. A monetary economy does not alter this key principle. What we spend must come from income, which itself must come from producing. Say’s Law teaches that only supply constitutes demand; we must produce before we demand, spend or consume. Demand is not a mere desire to spend but desire plus purchasing power.
Believers in “stimulus” also claim that government spending entails a magical “multiplier” effect on aggregate output, unlike most private sector spending. They tout a government’s greater “propensity to consume.” But consuming is the opposite of producing. Welfare states certainly consume and redistribute wealth. They divide it up. But math teaches that nothing – wealth included – can be multiplied by division. The so-called “multipliers” imagined by today’s economists are, in fact, divisors. Many studies have verified the principle.
To see why “stimulus” truly depresses, consult the basics. The creation of public money and public debt is not the creation of wealth; it is not food, clothing, shelter, energy or the like. Even privately generated money and debt, which reflect the needs of trade and lengthy production chains, represent, facilitate and circulate wealth but are not themselves wealth. Meanwhile, the savings borrowed by governments are unavailable to productive enterprises, and when a government creates fiat money beyond what money holders demand, the money loses purchasing power, which boosts the cost of living. These are not roads to prosperity.
The past five decades have seen no objective limit on public money or debt issuance. Since 1971, the last time sovereigns were on the gold standard, vast issuance of money and debt has impeded and depressed production instead. The U.S. money supply (M-1) since 1971 has grown by 6.5 percent annually, while industrial production has grown by only 1.8 percent. During the prior five decades (1922-1971), the money supply grew more slowly (4.9 percent a year) while industrial output increased far more quickly (4.4 percent). Since 1971 roughly 17 percent of U.S. federal outlays have been borrowed, twice the portion borrowed over the prior five decades. Since 1971 the U.S. has run budget deficits 92 percent of the time versus 64 percent of the time from 1922 to 1971. The trend has worsened lately, with 25 percent of outlays borrowed in the past decade versus 18 percent in the prior decade.
Keynesian and monetarist economists have long claimed that “automatic stabilizers” and flexible exchange rates help immunize us from deep or long recessions. When the private sector falters and “fails,” deficit spending and monetary devaluation supposedly kick in, boost demand and save the day. What about supply? More money and debt generate only nominal demand, not tangible wealth. If “automatic stabilizers” really worked, there’d be no need for trillions of dollars in extra “stimulus.” Economists typically blame recessions on “market failure” or “deficient aggregate demand,” but recessions are due mainly to government failure; when policies punish profits or production, aggregate supply contracts.
The $2.3 trillion CARES Act enacted in March pays those who do not work and do not produce. Many recipients are being paid more than their pay in a prior job. Do subsidies for non-work promote production? No, they prevent it. Yes, with free cash folks can buy existing goods, but that’s not new output. More production comes not from free cash but from freeing people to work. An end to today’s lockdowns – or tax cuts – would be true stimulus. Adopting instead the proposed $3 trillion HEROES Act would make matters worse. Again, funds will be borrowed; again, the Fed will monetize bonds; and again, output will be divided and diverted.
Recovery will come despite the “stimulus” and will be delayed if there’s more. My forecasting models foresaw a mild, brief U.S. recession in 2020 absent the CARES Act; with it, they signal a longer recession; if the HEROES Act is adopted, the recession could extend into 2021.
Pitching the HEROES Act, Speaker Pelosi (D-Calif.) said that “we can all agree we must open our economy quickly, but we must do so based on science and data.” True, but the U.S. economy has been closed without reliance on solid science, data, or forecasts. Pelosi also said, “We all know we must put more money in the pockets of the American people,” which is “necessary for their survival and a stimulus to the economy.” Here, what “we all know” simply isn’t true.
Economics, like epidemiology, is a science; its theories and forecasts must be logically valid and empirically grounded. No science or data supports “stimulus” claims. A supply-side approach holds that true “stimulus” requires private property rights, saving, investment, entrepreneurship, profit-seeking and production. Fiscal-monetary profligacy disorients and depresses economies. A genuine revival requires a revival of the supply-side prerequisites.
Most economists once held that “there’s no such thing as a free lunch.” No policy can get us something for nothing. Money and debt are not nothing, but nor are they wealth. Pushers of “stimulus” deny such truths; believing the impossible, they make prosperity unreachable.
Richard M. Salsman is president of InterMarket Forecasting, Inc., an assistant professor of political economy at Duke University and a senior fellow at the American Institute for Economic Research. He is the author of numerous books, chapters and articles, including “The Political Economy of Public Debt: Three Centuries of Theory and Evidence” (Edward Elgar Publishing, 2017).