Government Spending

DANIEL LACALLE is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.” Daniel Lacalle

Solution of First Resort

‘Spend now, deal with the consequences later’ is the worst policy

Governments and central banks have become the lender of first resort instead of last resort, and that’s immensely dangerous. Global debt soars, inflation creeps in, and many of the so-called supply chain disruptions are the result of zombification after years of subsidizing low productivity and penalizing high productivity with increased taxes.

There are many reasons why nations shouldn’t “spend now and deal with the consequences later.” First, the spending is made by politicians who won’t be held accountable for the malinvestment and unwise outlay decisions. Furthermore, the cost will always be paid by taxpayers and businesses.

Think about the irony of promoting an “Inflation Reduction Act” that means spending more and monetizing more debt. But it’s even more ironic to launch the Inflation Reduction Act after creating massive inflation with multitrillion-dollar stimulus plans and central bank balance sheet expansion. The government presents itself as the solution to the problems it creates and passes the bill twice to taxpayers.

Second, governments are extremely bad at picking winners but even worse at picking losers. Policy nudging, subsidies, and grants are often aimed at obsolete or politically favored sectors, which, in turn, leads to the rise in zombie companies. Government spending to “save” businesses tends to support those who are already highly indebted and with relevant challenges to paying their debts. This is bad, but picking losers is even worse. The world wouldn’t have a food and energy crisis because of a disruption from countries that account for less than 10 percent of supply if regulation and laws hadn’t placed enormous burdens on investment in farming, energy, and trade in general.

Third, the negative impact outweighs the positive. I remember a conversation in 2021 with Judy Shelton in which she mentioned how the U.S. economy would be stronger if it hadn’t implemented the stimulus plan. She was right. The enormous spending plans have created an unsurmountable structural deficit, as many programs are consolidated and increased, and the negative effect on growth, inflation, and real wages only a year and a half later is undeniable.

It’s undeniable that economies come out of every crisis with higher debt, lower growth, weaker real wage growth, and poorer job creation. Yet somehow, people think that the next time will be different. They said the same about 2020. And it was different. You got your check and paid for it multiple times over with higher inflation and more taxes.

Critics may say that this is easy to say in a recovery, but how do we explain to citizens that governments should do nothing? Herein lies another of the tricks from interventionists. We’ve grown accustomed to the idea that if the government doesn’t spend massively in a crisis, then it’s doing “nothing.” Enormous demand-side policies are essential, even when the problem has nothing to do with demand. Even worse, a $1 trillion plan must be followed by a $2 trillion one or it will seem too small, no matter what the problem or the outcome is.

Why is it so dangerous to use central banks and governments as the lender and solution of first resort? Because their main resource to implement those policies is your wealth. Expropriation of wealth is the other side of the “social policy” coin: taxes, inflation, or both. Some readers might think it’s a clever idea to expropriate the wealth of the rich to support the economy, but by now they should know that this is a lie.

When you give extraordinary powers to a government based on the idea that stealing from the rich is valid, you’re giving power to politicians to steal from you, as well. And they do. There’s no single example of a massive government spending plan financed with higher taxes on the rich that didn’t end in higher taxes for all or more inflation, which is a tax on the poor.

When you read “spend now, deal with the consequences later,” what you’re reading is give me your wallet, because you’ll deal with the credit card balance later.

The next time you read that dreaded phrase, remember: There’s nothing that the government gives “for free” that you don’t pay for one way or another.

When you give extraordinary powers to a government based on the idea that stealing from the rich is valid, you’re giving power to politicians to steal from you, as well.