Does Government Spending Bring Prosperity? P. L. Greaves. Jr.

374 t Spending rity? People pointed to idle factories, unemployed workers and their un satisfied wants. All we need to do, they said, is to get the government to start priming the pump. A little government spending would pro vide the would-be workers with the wherewithal to buy the things they desperately need. This would en courage businessmen to put the un employed to work in the idle fac tories. This solution sounded so simple, and its political appeal was apparent. So we tried it. People just plumb forgot all that economists had ever taught. Many desperate persons reached for whatever share they could get of the apparent prosperity that fol lowed. Until war changed the pic ture, the price they paid was chron ic unemployment by the millions. Are we now asking for a repeat performance? Most people seem to forget that 1975 DOES GOVERNMENTSPENDING BRING PROSPERITY? 375 the government can payout only \vhat it borrows or collects in taxes.

They also forge"t one of the most elementary facts of a free economy -men who will not accept going wage rates must remain unemploy ed. Likewise, they fail to un derstand the real causes of de pressions. A logical examination of pertinent data would show them that it was Federal Reserve money manipulation that brought on the depression we all deplore. We Americans truly need to know some very simple economic facts. No free man works, buys or sells unless he fully believes that such action will bring him greater satis faction than he could enj oy if he did not take that action. This means that in a free economy no man ever takes a job at any wage unless he believes he is better off working at that wage than he would be if he did not take it. Likewise, no em ployer ever employs a man at any 'wage unless the employer feels that he will better his situation by em ploying that man at that wage. So, in a free economy, employees and employers believe that they have the best available terms. When they feel otherwise, they shift jobs or employees.

In the same vein, no woman ever buys a dress unless she believes that dress will bring her more sat isfaction than any other use she could make of the same amount of money. On the other side of the transaction, no storekeeper ever sells a dress unless he places a higher value on the money he re ceives than he does on the dress he sells. As a result of the sale, both buyer and seller are happier. Thus, in a free economy, every freely made transaction benefits all participants. Consequently, any in terference with freely made trans actions must result in a decrease in the satisfaction and happiness of all persons concerned. An economy that is free from restricting regu lations thus permits its people to enjoy the greatest happiness they are capable of producing. The Proper Sphere of Government However, in order to enjoy the full pleasures of prosperity, it is necessary for peaceful people to be protected from all robbers, thieves and fraudulent schemers who seek something for nothing at the ex pense of their fellow-men. For this protective purpose, men have insti tuted governments. Governments, like all valuable assets, have a price.

This price is collected in some form of taxes. Reasonable· taxes are a legitimate expense for all protected persons, property and production. Taxes are like insurance premi ums. In fact, a good government might be called a form of life, fraud and robbery insurance. It is as nec essary for modern society as acci376 THE FREEMAN June dent insurance is for every car driver of moderate means. Without it, the risk of living, owning prop erty and driving might well involve financial risks that only a few could afford. Good governments permit people to pursue their pleasures and production while protected from the rascals who would in fringe on their rights by force or fraud. Taxes paid for this protec tion are an investment which per mits men to pursue their personal satisfaction and prosperity as each one sees fit. When governments spend money for other than protective purposes, they must first get that additional money. They can only get such funds by one or more of three dif ferent methods. They can amass such funds by collecting more ordi nary taxes, borrowing from private savers, or simply printing the extra money they want to spend. Most modern governments use all three methods. Can such government spending increase the transactions and satisfactions of individuals and, thus, the happiness and pros perity of the people as a whole?

Hidden Costs A most common economic error is the failure to see or realize the complete price of what one buys. People are too apt to reach for something they want now, without weighing the costs they cannot visualize at the moment. Many fail to realize that more beer and merri ment today may well mean no bread or meat tomorrow. So it is with government spend ing. We see the results of govern ment spending all around us. Gov ernment services are sold at bar gain rates below cost. The bureau crats are good steady customers, and the subsidy receivers spend money more freely than those who earn it. But many do not see the complete price. They do not see the schools, homes, hospitals and fac tories that could have been erected if the same funds had been left in private hands. They do not see that present bureaucrats could be pri vate citizens producing goods not now available, and that such an in crease in marketable goods would tend to reduce all prices and thu~ increase the satisfactions and liv ing standards of every buyer. They do not see the taxes that creep into the prices of every loaf of bread and pair of shoes, placing the prices of such necessities beyond the reach of the most needy.

When the government raises the money it spends by borrowing sav ings or taxing its citizens, it merely transfers spending power from private owners and to political spenders in power. This creates no new wealth. It reduces the amount private citizens can spend while increasing the amount government 1975 DOES GOVERNMENTSPENDING BRING PROSPERITY? 377 can spend. With less money in their pockets and bank accounts, private individuals and corporations must reduce the amounts they spend or invest. Assuming prices and wages remain the same, they ,must buy fewer goods and employ fewer workers on private payrolls pro ducing what people want most. Money spent by governments cannot create any more jobs or pro duce any more wealth than it can when spent by private persons. In fact, it creates less, because both the tax collectors and tax spenders must be paid a commission. Their labors add nothing to the wealth of society. The shift of the money from private citizens to political spenders must result in fewer pro ductive jobs, and thus a smaller amount of goods and higher prices than if the money had been left in private hands.

Pattern of Production Changed Political spending also changes the whole pattern of the nation's productive forces. If the govern ment spends its money by giving out subsidies to one privileged group, the productive facilities of the country are then partially di rected toward satisfying the de sires of that group instead of the desires of those who originally earned the money. Many workers and investors must shift from pro ducing goods and services for customers who earn their money, to producing goods and services for those who first receive the dollars distributed during the govern ment's spending spree. Then, too, much government spending is not based on the eco nomic principle of getting the most for the least. This permits political spenders to grant privileges to their friends. Such political plums provide more satisfaction and pros perity for nonproducers at the ex pense of producers. The net result must always be a reduction in the production of wealth. Any such re duction in the quantity of goods and services available in the market tends to raise all prices and thus reduce the satisfactions and living standards of every buyer in that market. So spending to help one group, laudable as it may seem, does not, and cannot, create gen eral prosperity.

Diversion to War If the government spending is for war or defense, then some of the nation's investors and workers must go to work producing muni tions and military supplies. All the savings and workers so engaged are withdrawn from industries satis fying the private needs and wants of individual consumers. The end result, of course, is a reduction in the satisfaction of the needs and desires of all those who prefer con378 T'RE FREEMAN June sumer goods over war goods. The nation may have full employment, but individuals must certainly get along with fewer consumer goods. Such lower personal satisfactions have never been considered greater prosperity. The only reason men and fac tories are ever unemployed is that they will not produce what con sumers want most at prices con sumers can and will pay. Both men and factories can always be em ployed, if they will accept market wages and prices. When they con sider these too low and rely on gov ernment to pay higher than market wages and prices with funds ob tained from private citizens, the immediate result must always be unemployment or lower wages for those formerly engaged in satisfy ing the desires of those whose money the government now spends.

Unless supported in idleness, these workers will soon gravitate to those industries or pursuits that benefit most from the increased government spending. Their com petition will bring wages down to market levels, and then no workers will any longer benefit from the in creased government spending. Any switch of money from pri vate owners to political spenders can only result in a redirection of the nation's productive forces and temporary gains for those who first receive the government orders or subsidies. In the end, a readjust ment of the nation's productive forces will become necessary. Dur ing the interim, total human satis factions will be reduced and the general welfare will suffer. Danger of Depression? The question now asked is whether a substantial reduction in present government spending would create a depression. Under the present restrictive labor and monetary laws, the painful read justment might well be long and severe. Under a free economy, with free market wages and interest rates, the necessary readjustment could be quickly made and soon everyone would be enjoying a much higher living standard.

If the government reduces both taxes and spending, it will leave more money in private hands. This money then can, and will, employ more people at higher real wages to make more of what people want most. The nation's productive forc es would be redirected toward sat isfying the wants of productive persons, rather than satisfying those who were the recipients of government expenditures. In a free market economy, every work er and investor tends to seek those outlets which will produce what consumers want most, as indicated by the wages and prices consumers will pay. So workers and investors 1975 DOES GOVERNMENTSPENDINGBRING PROSPERITY? 379 now engaged in satisfying politi cal spending would soon find more profitable outlets satisfying the increased spending of private producers. Everyone would soon have more. That is not a depres sion. That is prosperity. Results of Inflation In cases where the government prints the money, either directly or indirectly, by first printing bonds and then issuing new money with only its own bonds as security, the result is inflation. Inflation is a tax on everyone who owns or is owed a dollar. Its effects are more hidden than those of other taxes.

Another important difference is that inflation transfers economic wealth from one group of people to another group, as well as from private citizens to their govern ment. The inflation tax is a boon to all who owe dollars and a burden on all who are owed dollars. It changes the values of every contract that specifies a future payrnent in dol lars. It reduces the value of the money involved. This is a tempo rary boon to the payer but, in ef fect, a tax on the recipient. Under such inflationary condi tions, wise businessmen become hesitant about signing long-term contracts, so necessary for our present-day complicated produc tion system. Government inflation ary spending thus places an additional damper on prosperity, over and above all drawbacks and redi rection of productive forces brought about by government spending of funds amassed by taxes or bond sales. Those who first receive the newly printed money are able to buy a part of the nation's production without having made any contribu tion. They must profit at the ex pense of all those who have con tributed to the total production of fered on the market place. Since the rewards of productive contrib utors are less, some will retire or reduce their future contributions to the market. Production will be further reduced by the fact that some of the printed money recipi ents are supported in nonproduc tive pursuits. Total production must, therefore, be lower. This means there will be less for every one who spends dollars in the mar ket place.

Taxes which raise prices or cur tail private spending cannot in crease total human satisfaction. In creased taxes reduce the voluntary transactions of a free people and thus reduce their total satisfac tions. Contrariwise, any reduction in government spending and tax ing will increase the individual transactions of a free people and thus their individual satisfactions and prosperity.

380 THE FREEMAN June The Way to Prosperity Government spending is an ex pense or burden on total produc tion and human satisfaction. Gov ernment taxes are personal eco nomic sacrifices and should be paid only for the protection of life and private property. When taxes are so limited, they are an aid and stimulant to total production and human satisfaction. When they are collected to help some at the ex pense of others, they are a brake on both production and human satis faction. Any reduction in govern men t taxes and spending increases the goods and satisfactions avail able for all those who have dollars of their own to spend. Competi tion in the service of consumers is the one and only sure way to produce a prosperity per manently spiraling upward. All political spending for purposes be yond the protection of life and property are a snare and a delu sion. They discourage wealth pro duction both by decreasing the re wards of productive workers and by supporting others in idleness or nonproductive pursuits. In order to keep up the appearances of pros perity, government spending must be constantly increased, with an ever-increasing share of total pro duction going to the nonproduc tive. If these constantly increased expenditures are not stopped in time, the result will be a runaway inflation like that which took place in Germany in 1923. Government budgets balanced by inflationary spending can but bring a national headache, for which the only per manent cure is the intelligent use of our God-given freedom. I) iDEAS ON LiBERTY Reprints available, 10¢ each.

The Reason for Morality WE IMPOSE MORAL RULES upon each other, and then come to see the necessity of abiding strictly by them ourselves, because we recognize the overriding necessity of preserving-these rules in violate, if each of us is to live in peace and security, and to be free to pursue his own purposes. In brief, if we are to minimize conflict and to maximize social cooperation, we must be able to trust each other, and we can do so only in a society in which each of us can be depended on to act always and inflexibly on principle. HENRY HAZLITT ARE V lEW ER I,S NOT E BOO K JOHN CHAMBERLAIN SOMEWHERE IN SANTAYANA, I for get where, there is a remarkable passage about all the powers and the pressures in the universe that keep jockeying, as it were, for po sition to get in the clear on that inside rail. Fecundity and inven tiveness need channels. Leonard Read, who is as near an approxi mation to a saintly character as anyone could find, has lived his life as a channel clearer. He never ex ploits his own personality. But his new book CASTLES IN THE AIR (Foundation for Economic Education), is as redolent of a unique personality as a well-tended hope chest is of carnphor balls.