Hello, I am new to the Austrian School, and economics in general. Can someone explain to me why government intervention, on this such as public works is a bad idea. I hear all the time from people (like Paul Krugman), talking about how we need government to fix the problem, and they talk about WWII for fixing the Great Depression. If it wasn’t WWII, then what did fix the great depression, and how do you respond to the claims that we need government to get us out of the recession?
Please don’t take this as rude, but this sort of question gets asked a lot. Seriously. It’s as if some people have never seen the search function on the Mises site (yes, that’s a hint).
Short answer to your question: governments cause recessions. They don’t fix them.
Well, first let me suggest you pick up “Economics In One Lesson” By Henry Hazzlit. You can pick up here at the store for just $12, and you won’t regret it. The book is a classic and over 60 years old, yet it is more relevant today then ever. It will certainly expose for you all of the myths and fallacies about Government Intervention stimulating the economy.
Government spending is just a diversion of resources from the more productive private sector to non-productive programs mainly created for the sake of creating jobs, or by some pressure group lobbying for it. Any job that the Government creates or maintains by subsidy will generally mean a loss of a job in the private sector. This is because Government doesn’t have any money (savings) of its own that it can spend. It has to take it away, by force, from somebody else. So if I take $100 from you and spend it on a clock radio, that’s just $100 that you won’t spend on say, a coat. I then may try to convince you that I had stimulated the economy by showing you the Clock radio that wouldn’t have been bought if I hadn’t taken the $100 from you. Of course, the coat that you had to go without is not seen or noticed. There is not NET gain. So economically, one cannot gain by simply transferring wealth from person A to person B. Note that it would be a mistake though, to conclude that since there is not NET gain, then there is no NET loss. The job created by Government means a loss of a job that is actually productive, i.e, it creates wealth. By destroying a productive job in order to subsidize a non-productive, or more wasteful job, our purchasing power is lower and we are all poorer.
Krugman’s other big error is that he may justify the Government spending because people are not spending their money in these difficult times. So he wants to force them to do so. But this claim is based on the worst fallacy of them all. If the consumer isn’t spending, what is he doing with his money? He is most likely not keeping it under his mattress, but keeping in a bank. The consumer’s decrease in spending means more savings, which is exactly what the economy needs most for growth. Savings means available credit to be used to create new business or expand existing ones. It is savings that cause economic growth and not consumption, like Krugman thinks.
The only reason that you a guy like Krugman saying all this nonsense and getting so much publicity and attention is because that such pseudo-economics is desired by politics. Remember that it is politicians that run this country and not economists.
It’s helpful to consider Krugman, Bernanke, Greenspan, etc. as Inflation Technicians rather than scientists.
“Voters want more but want to pay less? Econobloat has the answer! And few will know what we are doing. And they won’t get national media exposure. Call Econobloat now for a good time now because in the long run we are all dead or out of office.”
Increase interest rates and government debt. If the government runs deficits to fund public works, obviously they have to take out loans. This means a higher demand for loans, which in turn means higher interest rates. This means that it’s harder for private businesses to get loans to expand production.
Increase taxes. If the government increases public works and decides not to run deficits, it will increase taxes. Obviously, higher taxes will slow economic growth by diverting what could be investment funds from the economy.
Increase inflation by monetizing government debt. When the government decides not to pay off its debt, the central bank will “monetize” that debt by printing new money to pay that debt. That means higher price inflation, hurting everyone.
All of these also crowd out private investment. By focusing on public works, government takes the labor, wood, cement, iron, steel, copper, rubber, etc. that would otherwise be used by private businesses. This increases the cost for running and operating a business, thereby hurting the economy.
The chap has already stated he is not an economist. Neither am I. I have spent 5 years reading the LvMI site and I am still a little confused. Dismiss me as thick if you like. Nevertheless, some of the things Keynesians say have a scintilla of obvious common sense about them and sometimes its useful for sbdy to offer brief explanations of key points rather than point you to a library of stuff on the topic.
For instance I fully appreciate Hazlitt’s point that govts merely move wealth around, but as I understand it banks are simply not lending at the moment. They are trying to build up their reserves. Likewise, companies are increasingly reluctant to invest for fear of poor returns. The Keynesian would argue that govt intervention could help to oil the wheels of the economy in this situation - lend where banks are not lending and encourage firms to invest aswell.
I am sure somewhere in that search engine there is an answer to this. I am instinctively an Austrian but am seeking intellectual conviction thru discussion and debate. Surely that is one of the purposes of a message board rather than a signpost on the way to the site’s search facilitiy?
Apologies if this seems a tad abrupt but I go on messageboards where the tone is more left wing and I get short shrift there from arrogant Keynesians who defiantly won’t admit any failure on the part of their school of economics for the last 10 years and then I come here where somone has asked a polite question of the Austrian school and the same happens re your answer.
The other posts on this thread have been very helpful.