Self-Perpetuating Pump Priming

July 4, 1949

Especially since its espousal in 1936 by John Maynard Keynes in his book The General Theory of Employment, Interest and Money, the doctrine of the “compensated economy” through government spending has played an ominous role. It has become a formidable weapon in the hands of the spenders and the statists. These are in fact the same people. For wherever you find a man who wants more government power, you find a man who urges more government spending. And wherever you find a man who urges more government spending, you also find a man who believes in more government power.

In view of the dangerous “antirecession” spending schemes now being put forward, it is worth repeating the point made in this column of May 9, that even if it were true that an inflationary budget deficit acted as a business stimulant, then producing that deficit through tax reduction would be at once more flexible, more effective, and less dangerous than producing it through higher government spending. Schemes for higher government spending always involve delays and lags both in getting them started and in getting them ended. Before new public-housing projects can be started, for example, there must be elaborate drawing up of plans and blueprints, selection of sites, condemnation proceedings or buying up of land, etc,

Once any government spending project has been started, moreover, it tends to become self-perpetuating. Let us suppose that the desired level of full activity and full employment has been achieved by government spending, so that any further government spending would simply bring price inflation. Nevertheless, the government just can’t abandon a bridge half-suspended or a housing project at the halfway stage, without the roofs on. These projects must be finished, regardless of the economic effect of finishing them.

But the situation is usually far more serious than this. All those who have been employed on these projects, and above all the officials who have been put in charge of their direction and who have been handed more imposing jobs than they ever held before, will fight tooth and nail, night and day, for the retention of these jobs, offices, powers, and earnings. They will lay down a constant barrage of official propaganda calculated to drown out all disinterested criticism.

All these added government expenditures, ostensibly undertaken to give a transient spurt to business activity, then become permanent. The proportion of government to private jobs steadily increases. This is the history of European socialism and of present disorganized European budgets. It will also be our own history if we embark on still more reckless government spending now on the excuse of countering the existing recession.

If, however, the government were to try to make its “compensation” by reducing taxes, taxes could be reduced immediately. Moreover, Congress could easily provide in advance automatic standards under which taxes could be restored again the moment the stimulation of a tax cut was no longer necessary.

Even Keynesians and other government spenders will probably admit that cutting the taxes of the lower-income groups will result in these groups spending more money on consumption goods. But they will argue that this will not be at all the effect of reducing corporate taxes or the taxes of higher-income groups. These groups, they will contend, instead of spending these “forgiven” taxes on consumption goods or investing them in expansion, will simply hoard the money.

But if there were any real prospect that these groups would hoard money instead of spending or investing it, wouldn’t it be a good idea to go on to ask why they would hoard? They would hoard either because existing price-cost relationships were making business unprofitable or because impending or existing governmental policies had undermined confidence in the future profitability of business.