Yesterday we wrote that we would take a crack at taxation today. So we will. And we’ll tie in some of the arguments against increased government spending while we’re at it.
One of the arguments put by mainstream economists and commentators is that government spending is necessary to ‘fill the gap’ made when the private sector stops spending.
It is typically argued that not only will the government spending ‘save’ jobs, but that it will ‘create’ jobs as well.
Of course, this argument is entirely false. In fact, not only is it false, it is just not possible.
Before I go into the details, we’ll take a quick scan of the mainstream media to show what they’ve got to say on the matter. We’ll start with Mr. Peter Switzer and his Yahoo!7 Finance column:
“The Budget Papers actually showed a chart of what would have happened to the unemployment queue if they hadn’t acted to stop big job losses. The 8.5% unemployment rate tipped for June 2011 would have been over 10%.”
If it’s in the budget papers it must be true. No vested interests there!
He does go on to concede that “we will have to pay for it down the track through higher taxes and less government spending.”
But don’t worry about it too much because “It could be argued that we will be helped to pay it off from the production and efficiency that will come from the $22 billion to be spent on our too old and unproductive infrastructure.”
Now, if you think we’re unfairly picking on Mr. Switzer we’re not. In fact Mr. Switzer is not alone in his commentary. There are many others who believe that the government spending your money and borrowing on your behalf is the cure to get the economy out of recession and back into growth.
His fellow Yahoo!7 Finance columnist Michael Pascoe is also spinning the same yarn:
“There is nothing intrinsically wrong about the federal budget going into deficit and $58 billion actually isn’t a particularly large amount. In fact, it would be absolutely wrong for it not to go into deficit during a recession – that’s the way you turn a recession into a depression… The economic cycle will continue to turn and our deficit will be paid down over time.”
Hang on. Why is it that your editor believes the hundreds and thousands of mainstream analysts and commentators are wrong?
By the simple fact that they fail to consider the future consequences of current actions.
Let me explain…
Much has been made of the plans by the government to borrow billions of dollars and then ‘invest’ that money into building roads, hospitals, school buildings, rail lines and other ‘nation building’ infrastructure projects.
The belief is that as these will add to the productivity of the nation it is money well spent.
Wrong.
Spending money is not the means by which productivity is created. Productivity is created by making things that are of use to individuals and businesses. The important would there is ‘use.’ Making something for the sake of it, and giving people money to buy it isn’t productive.
Imagine if the government spent billions of dollars to get companies to produce two-legged stools, and then gave individuals a voucher redeemable against the purchase of a two-legged stool.
Has this added any productive benefit to the economy? Only for the manufacturer of the two-legged stools. Everyone else in the economy has lost out. The manufacturer of three-legged stools has been driven out of business because no-one is buying his product.
Yet once the vouchers run out and people realize a two-legged stool is useless they will then want to buy one with three-legs, only they can’t because there is no-one to make them. The money spent by the government is wasted. The resources used to make the goods have been wasted, and the economy is actually worse off than it was before, because of the billions spent by the government.
Yet because it was financed by debt, the government needs to repay it. Which means taxing individuals to get back the cost of the vouchers plus any interest. But at least they’ve still got their two-legged stool.
But let’s use a real example of projects that are being touted as part of the ‘nation building’ plans.
If we look at some of the plans detailed in yesterday’s Australian Financial Review (AFR), the largest single project was for a ‘Regional rail express’ in Victoria that will cost $3.2 billion.
According to the Herald Sun newspaper, the Regional rail express plan will “accommodate 84,000 passengers on 120 extra trains during the daily peak” and will “allow an extra 14 trains an hour into the city from overburdened lines in the northwest.”
The problem comes with how these projects are financed by the public sector. It is either done through taxation revenue, or borrowings. Or both.
If it is financed through taxation revenue then that is $3.2 billion that has been taken from the economy. The government isn’t providing a boost to the economy at all when it spends this money. It’s just taking money from one bunch of people and giving it to someone else.
But because the supply isn’t market driven it is more likely to be spent where it is not needed or wanted. The spending on the Regional rail express is the equivalent of around taking $300 from each taxpayer.
That’s $300 each that taxpayers may have chosen to spend in a retail shop on clothes, or extra food items or electrical goods. Instead they are told their money is to be spent on a new train set.
In other words, it is $3.2 billion that could have been spent or saved elsewhere in the economy if the government hadn’t diverted the funds towards its own spending programmes.
But importantly, at best there is no net difference to the overall economy. The government hasn’t created any net new jobs, because those people that may be employed in constructing the rail links will be offset by those people who lose their retail jobs.
So what about if the government borrows the money to ‘invest’ in infrastructure? Surely that is new money. Surely that make sure taxes aren’t raised elsewhere and new jobs will be created.
Again this is false.
First, if the funding comes from debt, then the debt has to be repaid. This has to come from increased taxation, which again means less money in individual’s pockets, which means less money to save or spend, and again no creation or saving of jobs.
As we mentioned yesterday, by the end of next year the interest alone on the $133 billion of government debt will be $5 billion each year.
The idea that just building a road or a bridge or a school building will add to the economy does not make any sense. Building a new road for instance will only be productive if the industries using the new road gain some economic benefit from it.
Say, if the new road means an exporter can now supply their customers with 20 truckloads of goods per day rather than ten. Of course, this requires the demand for 20 truckloads to be there. And it assumes that a competing business does not lose an order for 10 truckloads due to the new road access for this exporter.
If the supply and demand of the goods being transported remains unaltered then it has not added $1 to the productive capacity of the nation. Sure, the people who built the road would have earned an income, but that was paid for from borrowed money which needs to be repaid. And remember, they are employed at the expense of others who have lost their jobs elsewhere in the economy.
In addition, the borrowings will all need to be repaid from increased taxation elsewhere.
The reality is that there is no substitute for private enterprise in a free market. A government cannot and does not add any productive capacity to an economy.
PS. Your editor is still amazed at the attack the government has launched on private savings. We warned a few weeks ago that the first steps had been taken by the government on the road to stealing your retirement savings. This week’s federal budget took things one step further.
We’ll have more to say on this in Money Weekend tomorrow, and Money Morning next week.
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