Economic Policies

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

Keynesian Policies: Debt, Inflation, Weak Growth

Rising government spending is a slow nationalization of the economy

The evidence from the last 30 years is clear: Keynesian policies leave a massive trail of debt, weaker growth, and falling real wages. Furthermore, once we look at each so-called stimulus plan, reality shows that the so-called multiplier effect of government spending is virtually nonexistent and has long-term negative implications for the health of the economy.

Higher government spending simply can’t be financed with much larger economic growth, because the nature of current spending is precisely to deliver no real economic return. Government isn’t investing; it’s financing mandatory spending with resources of the productive sector. Every dollar that the government spends means one less dollar in the productive sector of the economy and creates a negative multiplier cost.

The main problem of the past decades, but particularly since 2008, is that government spending and monetary policy have become solutions of first resort to any slump in economic activity, even if that decline was created by government decisions, such as shutting down the economy due to a health crisis. Furthermore, government spending increases and loose monetary policy continued even in growth periods. This, in turn, creates an unsustainable public deficit that needs to be monetized or refinanced. Both mean a larger harm for the productive sector as the debt increase leads to higher taxes for everyone but also a soaring cost of living coming from the destruction of the purchasing power of the currency.

Government spending doesn’t boost private sector activity, even less so when the entire budget is spent on non-investment outlays. It’s even worse when citizens believe that infrastructure or real economic return investments should be conducted with taxpayers’ money. If an investment is productive and economically viable, there’s no need to involve the government. At best, the government should only participate as a co-investor, as the example of technology and defense shows, but never as a resource allocator for a simple reason: Public intervention is always aimed at perpetuating the existing inefficiencies and maximizing the budget. Efficient resource allocation can’t come from entities that have a core interest in expanding the budget and always perceive any inefficiency or poor result as the consequence of not having spent enough.

The answer from Keynesians is that government spending is the driver of economic growth and helps the private sector recover, while deficits and debt are just creating “reserves” for the private sector, because one unit of debt is one unit of saving. Even if you believed this nonsense, what they’re saying is that your savings are at the disposal of government and that all private activity is at the service of the public sector, not the opposite.

Government spending consumes capital. It doesn’t create it. As such, government spending must be seen as the last resort option, not the first one. When it becomes larger and too big to curb, it simply consumes more capital through taxation and inflation.

Higher government spending financed with rising taxes and the weakening of the purchasing power of the currency is just a form of nationalization of the private sector.

The global economy is now on the verge of another recession after trillions of dollars of public stimulus plans and monetary injections. The narrative is that it’s all due to a war in Ukraine and a few rate hikes, but that’s simply laughable.

The economy’s capital is being swallowed by a rising government that always blames the most productive for not contributing enough.

Every single unit of government spending is paid by you, with more taxes, more inflation, or both. All government excess makes you poorer. The government doesn’t give you free money; it gives you expensive destruction of your options for a better future.

Constantly rising government spending isn’t increasing choice, freedom, and economic prosperity; it’s a slow nationalization of the economy. When inflation and stagnation set in, your dependence on government will be such that you won’t be able to complain and will only hope that government will absorb more external resources to compensate you. It doesn’t happen.

We all understand how bad a monopoly is. Now think about a government monopoly that has the power of repression and coercion.

The government doesn’t give you free money; it gives you expensive destruction of your options for a better future.