Sean Gabb on the car industry bailout:
“We are continually told at present – which is somewhat more than usual – how government spending had created, or will create, so many jobs. Therefore, the immense expansion of the British State since 1997 has created three hundred thousand jobs or whatever. Some deplore this because most of those employed can be expected to vote Labour. Hardly anyone denies there has been a net addition to the number of employed. The same reasoning underlies all discussion of how we are to get through the recession on which we have now started.
The truth is, however, that government spending does not so much create as displace employment. Every pound spent by the Government must first be taken from the people, who cannot then spend it for themselves. If the money is taken is taken through taxes, it exactly reduces the ability of the people to spend or invest it for themselves as they wish, or to save it for transfer, via the banking system, for others to spend or invest as they wish. If the money is borrowed, it again exactly reduces the amount of money that the people can borrow to spend or invest.
It is more complex if the money is printed by the Government – or, more likely nowadays, borrowed from the banks in a fractional reserve system. But if its effects are often hard to trace until after the event, inflation is no less a tax than any other means of providing money to governments. It may reduce the actual purchasing power of money left in the hands of the people. Given the downward pressure on manufacturing costs we have seen during the past generation, inflation will at best reduce the potential purchasing power of money that already exists.
This being so, the argument that government spending creates employment relies on a blindness to the concept of opportunity cost – that every pound spent on paying one salary is a pound less to spend on another salary. Put more simply, it is a case of what Bastiat described as “what is seen and what is not seen”. We see the jobs created by the Government in it “regeneration” projects. We do not see the jobs that would otherwise have been created to supply things that people actually would have bought had the money been left in their own pockets.
For the past six months, the argument has been reinforced by the claim that government spending is needed to make up for a disinclination by others to spend or invest. This being so, it will not be a zero sum game, but will create net employment. There is no doubt that there has been a deflation. People are borrowing less and saving more. The banks have been increasing their financial reserves. But it does not follow from this admission that government spending is needed to make up the deficiency. The fall in spending is not the cause of the problems we face, but is a symptom…“
What a pity the government have forgotten the lesson of Mrs Thatcher: government, like a household, which cannot go on spending more than it brings in:
“Now Mr. President, throughout history clever men—not all of then rascals—but none of them businessmen—have tried to show that the common sense principles of prudent finance don’t really apply to this government or that institution, to this business or to that household. Not so, they always do, and especially to government. In the real world large and persistent government deficits haven’t produced any cornucopia of full employment or rapid growth. On the contrary, we’ve seen country after country with substantial deficits run into serious problems of financial crisis and inflation. And to whom do they then turn? They turn to those countries and institutions who have persevered in prudent policies and just as sound finance is vital for households and government, so also is it the essential principle of international finance.”
Tags: economics