Governments and central banks have become the lender of first resort instead of last resort, and this is extremely dangerous. Global debt is skyrocketing, inflation is taking hold and many of the so-called “supply chain disruptions” are the result of zombification after years of subsidizing low productivity and penalizing high productivity with a tax increase.
There are many reasons why nations should not “spend now and deal with the consequences later”. First, spending is done by politicians who will not be held accountable for bad investment decisions and reckless spending. Moreover, the cost will always be paid by taxpayers and businesses.
Think of the irony of promoting a “Cut Inflation Act” which means spending more and monetizing more debt. But it is even more ironic to launch an act of inflation reduction after creating massive inflation with multi-trillion dollar stimulus packages and central bank balance sheet expansion. The government presents itself as the solution to the problems it creates and passes the bill on to the taxpayers twice.
Second, governments are extremely bad at picking winners, but even worse at picking losers. Political nudges, grants and subsidies are often targeted at outdated or politically favored sectors, which in turn leads to the rise of zombie companies. Public spending to “rescue” businesses tends to support those that are already heavily indebted and struggling to pay their debts. That’s bad, but picking losers is even worse. The world would not have a food and energy crisis due to disruption of countries that account for less than 10% of supply if regulations and laws had not imposed huge burdens on investments in energy. agriculture, energy and trade in general.
Third, the negative impact outweighs the positive. I remember A conversation in 2021 with Judy Shelton in which she mentioned how the US economy would be stronger had it not implemented the stimulus package. She was right. The huge spending plans have created an insurmountable structural deficit, as many programs are consolidated and increased, and the negative impact on growth, inflation and real wages only a year and a half later is undeniable.
It is undeniable that economies emerge from each crisis with higher debt, lower growth, lower real wage growth and lower job creation. Yet somehow people think next time will be different. They said the same thing about 2020. And it was different. You had your check and paid it multiple times with higher inflation and more taxes.
Critics might say it’s easy to say in a recovery, but how do you explain to citizens that governments don’t have to do anything? Herein lies another trick of the interventionists. We have become accustomed to the idea that if the government does not spend massively in a crisis, then it does “nothing”. Huge demand-side policies are essential even when the problem has nothing to do with demand. Worse still, a trillion dollar plan must be followed by a two trillion plan or it will seem too small, no matter how bad the outcome.
Policies should not be judged by their intentions, as Milton Friedman said, but by their results. And when the results are as poor as we have witnessed for nearly two decades, we must caution against this constant decision to spend more.
Why is it so dangerous to use central banks and governments as a lender and solution of first resort? Because their main resource to implement these policies is your wealth. The expropriation of wealth is the flip side of “social policy”: taxes and inflation, or both. Some readers might think it’s a smart idea to expropriate wealth from the rich to prop up the economy, but by now they should know that’s a lie. When you give extraordinary powers to a government based on the idea that stealing from the rich is worthwhile, you are also giving politicians the power to steal from you. And they do. There is not a single example of a massive public spending plan funded by higher taxes on the rich that has not resulted in higher taxes for everything or more inflation, tax on poor.
When you read “spend now, face the consequences later” what you are reading is give me your wallet, because you will be dealing with the credit card balance later.
Next time you read that dreaded phrase, remember: there’s nothing the government gives out “for free” that you don’t pay for one way or another.
The opinions expressed in this article are the opinions of the author and do not necessarily reflect the opinions of The Epoch Times.