“We can do without butter, but, despite all our love of peace, not without arms.  One cannot shoot with butter, but with guns.” — Joseph Goebbels, Nazi Germany’s Reichminister of Propaganda

Throughout time, governments have strong tendencies to simultaneously splurge on both domestic spending and the more sinister business of warfare. This is referred to as the “guns versus butter” economic model. “Butter” is synonymous with domestic spending, while “guns” is synonymous with military spending. As with any economic goods or services, there is always scarcity of labor, machines, raw materials, land, et cetera. Individuals find it very easy to understand that if you want to spend 100% of one’s resources on “butter,” no “guns” can be purchased or vice versa; there is always a trade-off.  Steel can be formed into either a refrigerator or a tank; it can not be used for both.
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It’s hard to not go gaga over the ideas and intentions of “stimulus packages” and ramped up government programs. After all, won’t it create a lot of jobs, boost the economy, and lift us out of a rough spot? This is what we’ve constantly heard from politicians and the media especially over the past couple years. “Government needs to do something.”

Never forget how government gets its money. It does not earn it. It does not work for it. Every penny that goes to government must come forcefully from a productive area of the economy. Government can’t take money from a failing business or struggling individual, it must forcefully take money from wealthier (i.e. productive) businesses and individuals.

This brings us to the first problem with “stimulus projects” in the form of increased government programs, public works, and public spending in general. The only way any government can afford to spend billions and trillions of dollars “stimulating” the economy is to either tax, borrow, or print that money. In other words, people will either directly lose more money to government through taxes, the effect may be felt in the longer-term through debt and borrowing, or the currency will depreciate and prices will rise through the process of monetary inflation. Pick your poison; all three options for government to increase spending will inevitably pinch people the most either directly or indirectly.

“Stimulus packages” aim to boost the economy in the short-term. If government can provide jobs to build public entities (such as transportation options, buildings, etc.) the economy will correct quicker than if the market could work, right? The problem with this theory is people always ignore where that money comes from. Taking money from productive sources in the economy and throwing it to unproductive and expensive projects does not set the economy on a sustainable foundation.

Strong economies are not build on artificial spending. The more that government takes from productive sources in the economy and pumps it into unproductive government projects, the longer the correction and recession will be. Consider some of the projects being funded under Obama’s massive spending plan. One is building a light rail track. This is all well and good, but how is spending billions of dollars on a train track and system going to increase long-term productivity? Few people use government-operated trains as it is (witness Amtrak and its black hole of wasted money), it will simply require more funds sucked out of productive sources to survive.

People buy into the illusion that as long as people have jobs, regardless of productivity, it is good for the economy. Unproductive jobs do no good for the economy and will not expand sustainability and prosperity. Napoleon tried to create jobs and work just by paying people to dig up ditches and fill them back in. It’s a nice idea, but it won’t do a thing to improve the economic picture. It is when labor is efficiently and sustainably used that an economy will expand on a strong foundation.

Today we are seeing government promote and prop up unproductive entities like nothing else. First, we bail out companies who lived beyond their means, made terrible business decisions, and recklessly spent money. These companies were unproductive and hurting the economy. Second, we have the ongoing “stimulus package” pumping money into pork projects that will not be productive in the least. It may sound great to build roads and infrastructure to stimulate the economy, but it won’t create wealth and expand productivity. It is not beneficial to use productivity to fund nonproductive goals. It is a bogus and failed theory that we continue to follow. It will not help the long-term economic picture.

One does not need to look very hard to see how terribly these government shenanigans have failed in the past. The Great Depression is the first obvious example. Hoover and Roosevelt both increased taxes, public projects, and expanded government with hopes of curing economic ills. Subsidies, public works projects, and many other government programs were created and expanded in the 1930s. Roads were built, prices were propped up, and government would not let the market organize labor and money on its own. Despite the intervention and spending efforts from government, unemployment was higher in 1939 than in 1931. The New Deal cost billions of dollars and expanded the federal government like never before, but unemployment and productivity still did not improve.

Let’s take a brief detour to the recession of 1921. Few people have heard of this recession because government actually decreased its size, spending, and taxes during the rough economic period. The government and Federal Reserve did next to nothing as the economy began to correct after the government’s market intervention during World War 1. The government (to the disappointment of some interventionist politicians), rather than increase its role as it would do disastrously just eight years later, ended up sitting this recession out. Prices fell, unproductive businesses failed and reorganized, and the economy was back on its feet after no more than 18 months. The pain was brief, the correction and reorganization was quick, and it all happened largely because government reduced its size and let the market shift money and labor to productive areas of the economy.

In more modern times, Japan’s “Lost Decade” can be another example of the botched intervention of government and the central bank. Some believe that Japan did too little to “stimulate” the economy, when the government and central bank actually took a nearly identical road to the U.S. today. Failed businesses were propped up by government, the central bank lowered interest rates to 0% for a time and pumped cheap money and credit into the economy, and huge amounts of Yen were spent on unproductive and essentially worthless public projects. All of this did nothing but lead to huge government debt and a devastated economy.

It’s hard to understand how much money Keynesians want to spend on “stimulating” the economy. Paul Krugman, the front-runner of the Keynesian crowd, is calling for a second and larger stimulus package. The trillions of dollars already pumped into unproductive businesses and projects wasn’t enough? How much do these guys think we need to spend to bring about their Keynesian Utopia? Rather than realize that government intervention and central manipulation have done more to agitate the economy than help, people are crying for more of the same that historically has done more damage than good.

Government is great at managing the time, labor, and money of other people. It also guarantees that politicians won’t manage that time, labor, and money more efficiently than the people who own that time, labor, and money. The very concept that by taking from productive parts of the economy and spreading it to various unproductive jobs and projects is downright silly. The worst recessions and depressions have come in many countries when government prevents the market from reallocating funds from unproductive businesses and sectors to the strong and productive areas of the economy.

Preventing the failure of a large corporation because jobs would be lost is the equivalent of saying that government should have propped up horse and buggies and the many jobs in the industry regardless of its uselessness to society. The natural order of a free market is to shift funds to the strongest, smartest, and most productive businesses and industries. When government gets in the way with bailouts, “stimulus plans,” and countless other intervention methods, it only guarantees inefficiency, unsustainable activities, and prolonged suffering.

The answer to our economic problems does not lie in government spending as Paul Krugman and many other Keynesians would like, but in more freedom for the market and people to reallocate money and labor to the productive and sustainable portions of the economy.

It is laughable that with a proposed $1.75 trillion deficit in 2009, there can be any serious discussion of fiscal responsibility from government officials. The basic principle, if you can call it that, that you can regulate yourself out of a problem is questionable at best. We’ve tried to defy the laws of economics before to get out of trouble, most notably in the Great Depression. Taxes, public programs, government intervention, and spending were all increased by leaps and bounds in the 1930s. It did nothing to lessen unemployment and only prolonged the depression. It wasn’t until Truman took over and pulled back many of FDR’s policies that the economy began to recover.

I have never heard of an economy that collapsed because of too little government intervention. Throughout all of history, government intervention and central planning have done nothing to save an economy and increase prosperity. Rather, they have led to the economy’s destruction and demise. The Roman Empire fell largely due to devaluing its currency and overextending its quest for world empire. I ask you for just one example in history where a troubled economy was saved from central planning and government intervention, that otherwise would have perished had the marked been left undisturbed to deal with the problems.

As hard as we might try, you cannot spend record amounts of money, inflate the currency like never before in recent U.S. history, drastically increase regulations, and expect to create lasting wealth and economic strength. The Federal Reserve has used its monopoly over money and credit at increasing levels over the past 30 years or so, which has done nothing but worsen the boom/bust “business” cycle. Central planning from the Federal Reserve, with next to no oversight from Congress, has brought the U.S. to this situation more than any other factor. The fact that the Fed is getting through our current situation with hardly a speck of blame ought to be very disturbing to the majority of the citizens of the U.S., or at the very least somewhat discussed in the mainstream. The whole concept of the Fed itself completely contradicts a free society.

Looking at basic history of interest rates over the past 10 years, as controlled by the Fed, shows us that there is a close connection to low interest rates and a subsequent period of short-term, unsustainable economic growth. When the bubble economies reach their full height and the begin to unravel, the Fed immediately goes to the printing presses as the calls for lower interest rates abound to keep the economy strong. What caused the problem in the first place is seen as the ultimate solution just a few years later. The Fed lowered interest rates sharply in 2000 through 2001 to help re-inflate the economy from the bursting tech bubble.

Today the Fed’s taking the same road as it did in 2000, only at even greater extremes. The more the Fed inflates the dollar, the larger the bubble will be, and thus the inevitable correction will be that much worse.  In an effort to prevent the correction, interest rates are lowered even more, once again. Essentially, as the correction becomes more delayed through money and credit manipulation, the economy continues to build up on the unstable, wildly inflated foundation. So, while in the short-term it may sound like a reasonable solution, it will not solve a thing over the long run.

This is why I cringe when I hear about trillions of dollars being thrown at the economy in an effort to create a ripple effect of job creation and wealth. The main problem I see among many is that there is very little sound reasoning for this “stimulus” plan. Government debt and deficits will continue to skyrocket at unbelievable rates, the Federal Reserve certainly will not be slowing down its expansion of the money supply anytime soon, yet somehow this is supposed to be a longer-term solution to these problems. Just the fact that there is no source where this money can come from should be a major concern. All that is happening here is a delaying effect, but one must wonder how long the government and Federal Reserve can delay a recession that the economy is pleading for. Government shenanigans and central manipulation work well for a time at delaying the inevitable in the short-term, but as history has masterfully shown us time and time again, it will not delay the correction forever.