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Affluent Christian Investor | May 27, 2020

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Let’s Please Not Insult ‘Stimulus’ By Calling This ‘Stimulus’

It’s not unreasonable to assume that if asked, most who’ve heard of supply-side economics would identify it as the Laffer Curve. The previous curve, named for the great Arthur Laffer, is one of life’s truisms: reduce the tax penalty levied on labor, and the result is usually more labor producing more taxable revenue.

Of course Laffer himself would stress what’s also true; that supply-side economics is about so much more than tax revenues. In reality, supply side is a statement of something so obvious that it’s amazing it even requires stating: all demand is a consequence of supply. We’re only able to “demand,” to “consume,” insofar as we supply something of market value first.

In that sense, true supply siders are ultimately realists. They recognize that a focus on “demand,” something the vast majority of economists focus on, is a total waste of time. As human beings we have infinite demands that we can only fulfill insofar as we supply something of market value first. If rising demand is the goal, the easy answer is for politicians to go out of their way to reduce governmental barriers to production.

Income taxes place a penalty on work, so keep them low. Capital gains taxes penalize the savings and investment that power enormous productivity advances among workers, so ideally reduce that number to zero. Regulations distract producers while invariably achieving much less than the ultimate regulator (market competition itself), so reduce them. Tariffs tax the purpose of our work (to import, whether from across the street or the other side of the world), plus they slow the division of labor that similarly powers enormous productivity advances fostered by individual specialization. And then money, when its value has a reasonable constancy to it, facilitates the exchange that enables specialization, along with the pushing of resources to their highest use (investment) by savers.

Lastly, there’s government spending. Some self-proclaimed supply siders oddly view the mere mention of reduced spending as a sign one embraces austerity. Actually, government spending is in most instances the austerity. Think about it. Governments don’t spend money as much as they, through their tax collections and borrowing, direct precious resources to sub-optimal and often politicized uses. Basically governments, in their takeover of resource allocation, shrink productivity-boosting investment by the trillions on an annual basis. Translated, government spending is a major barrier to production.

Which brings us to the “stimulus” package just passed by the Senate. To be clear, it has nothing to do with “supply side” or the reduction of barriers to production. Quite the opposite, really. To call it a “stimulus” bill is to insult the very word.

To understand why, readers need only contemplate why the federal government has money to spend, or the capacity to borrow in order to spend in the first place. It does because the American people are wildly productive, and the federal government has sadly arrogated to itself enormous amounts of that production.

To be clear as possible, the federal government only has $2 trillion to hand out based on economic growth that’s already happened. For economists, politicians and pundits to pretend, as so many are doing, that the $2 trillion in outlays will actually stimulate economic growth amounts to double counting of the worst kind. More realistically, the faux stimulus package will reduce it.

We know this because the bill merely shifts wealth from one set of hands to another. The federal government extracts enormous wealth annually from the economy through taxation and borrowing, only to redistribute it. There’s no growth in those checks going out, or alleged “liquidity” provided to corporations suffocated by politicians on the local, state and national level; there’s just a shift of consumptive ability. Consumption doesn’t power growth as much as it’s a consequence of it. Again, the growth already happened.

Worse, if the spending is looked at through the prism of supply side, is the incentive effects of it. In a normal world free of government meddling, individuals would work and produce in order to attain the capacity to consume. But when governments hand out the money of others, the production part is no longer necessary. In other words, the bill that won’t stimulate is anti-production.

Which brings us to the most economy-crippling aspect of the Senate bill that will in no way stimulate: it’s anti-investment. Though it’s previously been said that the federal government’s access to trillions worth of American production on an annual basis is a consequence of it legally arrogating to itself a substantial piece of that production, let’s be clear that not all producers are equal producers of funds for the federal government to redistribute. Most of those funds come from a tiny part of the U.S. population: the rich and superrich. This matters a great deal when it’s remembered that the rich, precisely because they are, have really no choice but to invest the copious wealth they don’t spend, and there are no companies and no jobs without investment first. Yet in its infinite wisdom, the political class is redistributing wealth from the well-to-do most capable of investing, and directing it toward those most capable of consuming.

To be clear, the $2 trillion will be consumed when, if not extracted by the political class, it might have been invested. Supply siders in good standing who actually understand it, should be aghast.

The Senate bill doesn’t stimulate, and it doesn’t precisely because it has nothing to do with production. Which means it’s an economy-sapping non sequitur. Americans were producing with great gusto until a few weeks ago, only for politicians to take from them their right to produce. Translated, command-and-control was imposed on the most dynamic economy in the world only for politicians to extract another $2 trillion from that same economy. Oh dear…You don’t overcome command-and-control with more central planning, but that’s exactly what’s happening.

Which brings us back to the great Arthur Laffer. In thinking about him, an old quip from John Maynard Keynes comes to mind. Sometime in his final years, Friedrich Hayek congratulated Keynes on his many, many disciples. Keynes responded with somewhat bemused disdain.  Laffer is too gracious to do the same today, but it’s interesting to imagine what he really thinks as an opportunity to try the actual ideas of supply-side growth morphed into yet another Keynesian freakout that has nothing to do with the production that actually stimulates prosperity.

This article originally appeared on RealClearMarkets.

 

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