There’s Growth and then there’s Growth

The outcomes of the Greek and French elections last week, serve to emphasize a perceived, and real, need for economic growth.  That need exists in the US, also; those elections serve to highlight our need, as well.

But what kind of growth is intended?  Carsten Volkery hints at the version preferred by the Left in Europe (and, I submit, it’s a view shared by our Progressives, here at home; accordingly, I’ll just write about Europe in this post and incorporate our Progressives by extension).

Volkery opens his description of the Left’s version of growth this way.

[The European fiscal pact, an effort at national budget discipline] will, however, be augmented by a separate “growth pact.”  It is currently unclear just what form this growth pact will take.  But it seems safe to assume that it will not be particularly ambitious—European leaders want to stimulate the economy without putting too much strain on their budgets.  Massive debt-financed investments are still regarded as a taboo. Additional transfers from the wealthy north to the impoverished south also seem unlikely.  It is, in short, unclear if Europe can even afford growth.

Stimulate the economy through their budgets.  Can Europe afford growth?  I.e., more government spending of some sort.  Volkery then suggests some ways to achieve this greater spending, this “growth.”

Relax the austerity targets…domestic demand would benefit….

But this Keynesian adherents’ conflation of a government-fueled artificial demand with the true economic demand of a nation’s private economic participants—the citizens and their businesses—has already been proven to result in failure to stimulate anything beyond growth in government: here in the US in the 1930s and again in the years since 2008, and in Europe in that same post-2008 era.

Cheap money from the ECB…cut interest rates further, which would stimulate demand.

The US Fed has been holding interest rates artificially low, to the point of going negative in real terms, for years.  No demand stimulus has resulted.  Further, cheap borrowing still is more debt, the wrong answer for an economic dislocation caused by too much borrowing.

Structural reforms…liberalizing the labor market, increasing the retirement age and reducing barriers to trade [to] increase competitiveness, and…stimulate the economy.  Such reforms only have one problem: they don’t help much in the short term.

This is true enough, but it’s not an argument to not implement the reforms; it’s an argument to stop dithering about them, and get them in place.  As the reforms take effect, government’s intrusion into their citizens’ lives will be reduced, they’ll have more room for their own decisions—and more money with which to act on those decisions.  More true economic demand.

EU investments: These could take different forms.

And every one of them amounts to increased government spending, increased government borrowing, or increased government selection of business winners and losers, or all three.

No, the only growth each of these various plans for increasing government spending and borrowing can stimulate is in the size of government’s debt and the size of government and its intrusion into the lives of men and women.

To truly stimulate growth in economies, what is needed is not budget discipline through reduced government spending and increased taxes, but budget discipline through reduced government spending and reduced taxes on a broadened tax base, and reduced government borrowing.  Most especially, there’s no room for increasing (again) government spending or borrowing.

The more money that is left in the hands of the people who’ve earned it, the more freedom those people will have to set their own goals, to develop their own ideas, to do their own innovation, to form their own small businesses—and to hire even just one or two or three others to work in their businesses.  In the aggregate of all these burgeoning small businesses is the growth of employment—with even more money in the hands of those earning it.

The less government competition for goods and services—and labor—the lower prices will be, and so the money left in the hands of those earning it will go farther—further stimulating economic growth.  Yes, those lower prices will impact those small businesses, but those lower prices will impact  their supply prices, too.  The businesses will thrive with the growing demand from that increase in money and decrease in prices—costs.

There’s another effect from reduced government spending that’s often overlooked.  Government spending often serves to substitute for individual spending: why should a person buy this or that good or service, if government is going to buy it for him?  Less spending reduces this substitution effect, putting the money back into the private economy where it belongs.

With more people having skin in the game—from everyone being taxed, for instance, even at those reduced rates—more people will play an active role in their own lives and in the politics that, ultimately, structure their lives.  This is entirely appropriate.  A free people must be politically active, or they lose their freedoms.  Pericles and Plato were right on this.

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