C + I + G = Baloney! (Or, How Government Spending Is Driving Us to Bankruptcy)

The world’s largest economies are being prevented from recovering from massive malinvestment by wrongheaded governmental interventions. Japan, currently the world’s second largest economy, has had zero growth for twenty years. A good case can be made that the U.S. has had zero growth for ten years, because the so-called growth of the first decade of the new millennium now appears to be phony. All those houses were built at a loss, which we are only now recognizing. We have yet to plumb the total extent of the rot.

The causes of the worldwide crisis are hardly debatable. Governments everywhere spent vast sums while forcing their central banks to keep interest rates low. The increased spending went to non-productive transfer payments and to subsidize government’s idealized societal improvement plans, most notably--in the U.S., anyway--that every man deserves to own his own home. So, Uncle Sam, how did that work out? Well, the damage is done and now the task at hand is to get back to work and rebuild the capital that was wasted or, as we Austrian economists say “malinvested”.

Unemployment is high, which, frankly, is to be expected according to Austrian economic theory. It takes time for labor to find new jobs in new industries, which may require learning new skills. People may have to move and, of course, will be reluctant to do so until other, less disruptive alternatives, have been exhausted. Government has no idea what opportunities exist for labor; therefore, it should do nothing to prevent labor from re-deploying as quickly as possible. As harsh as it may seem, unemployment insurance payments actually slow down this essential process. Raising the minimum wage doesn’t help either. Although many who lost their jobs are not minimum wage workers, a pernicious consequence of raising the minimum wage is that it forces up all wages. When the cost of labor increases, there are fewer employment opportunities even in the best of times…and these certainly are not anywhere near the best of times!

Victims of a Failed Economic Theory

Unemployment insurance payments and high minimum wage laws represent the typical wrongheaded policies that flow out of failed Keynesian economic theory. The working man may find it hard to believe that he is the victim of an economic theory, but that is the case nevertheless. He might be even more amazed that he is the victim of a fallacious economic equation, to wit, C + I + G = GNP. This is the simple version of the Keynesian definition of Gross National Product as the sum of Consumer Spending plus Investment plus Government Spending.

This destructive economic theory maintains that spending is all-important. By viewing the Keynesian GNP equation, one can easily see why Keynesian economists, who control the levers of government, believe that it is possible to “stimulate” the economy with government money. When consumer spending and investment drop, GNP must follow downward with mathematical certainty unless government increases its spending. We have had one massive trillion dollar spending spree, a cash-for-clunkers program, and more bailouts of failed businesses than I can count…and yet the economy continues in the doldrums. Ominously, the Obama administration is considering ANOTHER trillion dollar stimulus! Why won’t this work?

Government Spending Is a Parasite on the Private Economy

The key fallacious concept imbedded in Keynesian economics and characterized by its famous C + I + G = GNP equation is that government spending ADDS to an economy’s health. No. Government spending SUBTRACTS from an economy’s health. The real economy is the private economy; there is no other. Government spending comes out of the private economy. In olden days, no one would have accepted the argument that the king could help his nation’s economy by increasing his spending. The king’s spending was funded by taxes from the people. It is the same today, notwithstanding the eyewash of central bank manipulations of its manufactured paper money.

All government spending is parasitical. We need some government, of course, but the less we need the better off we are. No one would claim that an increase in crime that requires hiring more police or an increase in international tensions that requires a larger military would be good for an economy. Better that people are honest and other nations friendly so that we do not need to provide resources for more police and a larger army. We would much prefer that our sons and daughters produce goods and services that improve the quality of our lives than that they stand sentry on America’s frontiers, all at our expense.

Government programs that do not provide essential security services are especially illogical. For example, paying people not to work, which is the consequence of unemployment insurance, must come out of funds that WOULD employ people! All government welfare programs are funded by the private sector and do not add to the nation’s wealth, as the Keynesian equation would imply. The funds for these programs come out of the private economy and further stifle its ability to increase the nation’s wealth by reducing capital formation. Caring people feel the right to lobby government for more funds for the needy--although taking from some, at the point of a gun, to give to others is morally questionable—but they cannot and should not claim that providing such funds is anything but harmful for any economy.

Can We Get Ahead by Picking One Another’s Pockets?

Once the government gets the power to tax for the purpose of alleviating poverty, there is no logical stopping point. The people will demand further expansion of these programs not because they believe them to be worthwhile but because they feel victimized and want some of their money back in the form of their own benefits. The common man may not know the term “tragedy of the commons”, but he knows it when he sees it. His efforts will be for naught, though, due to another economic phenomenon—the fallacy of composition, which states that what may be beneficial for a segment of the economy cannot possibly be beneficial for the entire economy. Put simply, we cannot all subsidize everyone else and come out ahead. We want our subsidy from others but do not want others to demand a subsidy from us. But the inexorable demands of ever more special interest groups will make fleeting whatever benefits we do extort from government.

Yet Keynesianism institutionalizes the tragedy of the commons—that commonly held resources will be plundered to extinction--and claims that the fallacy of composition does not apply. We can all pick one another’s pockets and all of us can get rich doing it!

The only solution is to declare Keynesianism as dead as its author, end all government parasitical spending, and free the economy from the tyranny of bureaucrats armed with restrictive regulations. The latter is crucial, for to end welfare spending without freeing man from the straightjacket of the regulatory state would be to free him to starve. But in a totally free market economy, where each man is free to cooperate with all other men on terms agreeable to each and without harming others, prosperity and peace will prevail. It is the sure road to our salvation. Cuts in government spending are not “austerity programs”, as the mainstream media maddenly states, but are acts of economic liberation. So, lets bury that C + I + G = GNP baloney and get back to work.