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Government stimulus disproven... yet AGAIN [May. 28th, 2010|01:31 pm]
The Deuce
A trio of Harvard economics researchers have discovered, to their surprise, what those of us not drinking the socialist/Keynesian Kool-Aid have known forever - that government "stimulus" actually damages the economy rather than stimulating it:

Recent research at Harvard Business School began with the premise that as a state's congressional delegation grew in stature and power in Washington, D.C., local businesses would benefit from the increased federal spending sure to come their way.

It turned out quite the opposite. In fact, professors Lauren Cohen, Joshua Coval, and Christopher Malloy discovered to their surprise that companies experienced lower sales and retrenched by cutting payroll, R&D, and other expenses. Indeed, in the years that followed a congressman's ascendancy to the chairmanship of a powerful committee, the average firm in his state cut back capital expenditures by roughly 15 percent, according to their working paper, "Do Powerful Politicians Cause Corporate Downsizing?"

"It was an enormous surprise, at least to us, to learn that the average firm in the chairman's state did not benefit at all from the unanticipated increase in spending," Coval reports.

Will those "scientific" socialists, now that we have this study demonstrating the harm that socialism does, accept the evidence before them and change their ways? No, of course not. This is hardly the first time socialist economics has been empirically disconfirmed. The economic failure of socialism has been demonstrated every single time it's been tried, but that doesn't stop foolish people from clamoring for more government-run healthcare, government-run education, and more and more government spending on whatever suits their fancy. At the end of the day, Leftism is a dogmatic religion. It was never adopted for empirical or rational reasons, and those who follow it will rarely drop it because of empirical data or rational analysis. Socialism has absolutely no rational or empirical foundation whatsoever, and still they believe.

It's easy to see why simply throwing government money around can't stimulate anything, if you just step back and think about it a little bit.

Wealth is not the same thing as money. In and of itself, money is worthless, just metal trinkets or pieces of paper (or even just bits on a computer). Wealth actually consists of goods and services that people want and need. Another way to say it is that wealth is goods and services that there is a popular demand for, and yet a third way to say it is that wealth is those goods and services that improve peoples' quality of life. The value of money derives entirely from one's ability to trade it for actual wealth. If, say, tomorrow prices suddenly went up so much that a loaf of bread cost a billion dollars, or every time you made some money Uncle Sam took all of it away before you could spend it, your money would be worthless, because you could no longer trade it for stuff you want and need.

As should be intuitively obvious then, when the government prints cash and throws it at states and various pet projects, it is not creating wealth. Increasing the amount of metal trinkets and green pieces of paper does not just magically increase the available amount of the goods and services that people want. In fact, while the government could invent a potentially unlimited amount of money, the amount of wealth that a society can potentially have has a hard upper limit, because it relies on the ability and manpower of the population to produce it. The key to a successful economy is to maximize the amount of actual wealth generation - the production of goods and services that people want - thus maximizing the overall quality of life (ie wealth) of the society.

Government spending, however, does the exact opposite of that, which is why it harms the economy rather than helping it. By definition, when the government spends some money on a project, it is spending that money on stuff the government wants (or thinks that people should want) rather than on stuff that people actually want.

When the government pays 1000 people to dig 1000 holes in the ground and fill them back up (to borrow from Keynes own absurd example), it is not creating wealth. There is no demand for 1000 re-filled holes. Nobody wants them. An un-hole in the ground doesn't improve anyone's quality of life. But such spending is worse than a mere waste of time, because if those 1000 people weren't digging holes for the government, they could be spending their time doing something else - practically anything else - for which there was actual demand. So by paying people to do things for which there is no demand, the government actively diverts society's most valuable resource - manpower - away from wealth-generation, thus actively inhibiting the economy from reaching its wealth-generating potential.

And, of course, where does the government get the money for such wealth-diminishing projects in the first place? It either taxes it from productive, wealth-generating citizens, or it prints it outright, which diminishes the existing value of wealth-generating citizens' existing monetary possessions, and is actually just another way of taxing them indirectly. So either way, the government diverts monetary resources away from wealth-generating people to pay potentially wealth-generating people not to produce wealth. So government "stimulus" actively inhibits the economy by diverting both money *and* manpower away from activities that create wealth and improve quality of life, and towards activities for which there is no demand.

So it's hardly surprising that, as this study shows, companies in states that got more federal money "retrenched by cutting payroll, R&D, and other expenses". The whole reason that companies spend money on R&D in the first place is to increase consumer demand for their products and services, and that becomes moot when the government is paying them to *not* meet consumer demand. And why wouldn't they cut payroll? The reason companies hire more people in the first place is that they want to expand in order to meet customer demand... which is moot when the government is paying them *not* to meet consumer demand.

Or to sum it all up, this study ought to be unsurprising to anyone who hasn't completely ignored the observable results of socialism for the past 100+ years, or who understands that waving a magic wand can't make houses, and TVs, and cars, and clothing, and food, and masseuses, and everything else people want just appear out of thin air. But none of it will stop the socialists from believing.
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Comments:
[User Picture]From: marycatelli
2010-05-28 06:27 pm (UTC)

Unsurprising

nevertheless in dire need of being shouted from the rooftops
(Reply) (Thread)
[User Picture]From: ilion7
2010-05-28 09:48 pm (UTC)

for clarity

"Increasing the amount of metal trinkets and green pieces of paper does not just magically increase the amount of goods and services that people want."

For the sake of clarity, I'd edit that to "Increasing the amount of metal trinkets and green pieces of paper does not just magically increase the [available] amount of [the] goods and services that people want."
(Reply) (Thread)
[User Picture]From: the_deuce
2010-05-28 09:54 pm (UTC)

Re: for clarity

Ah, good suggestion. I've done it.
(Reply) (Parent) (Thread)
[User Picture]From: ilion7
2010-05-29 04:39 am (UTC)

comment

If you're interested in it, I'm writing a blog-item based on this one.
(Reply) (Parent) (Thread)