I know I've addressed the subject of government stimulus before, but the latest from the White House on jobs just begged to be readdressed.
When somebody tells you that your lunch is free, what you are really being told is that it won’t cost you anything — right now. People with “street smarts” know “there ain’t no free lunch” and that somebody, somewhere has paid for it — or will pay for it. Street smart people also know that, sooner or later, somebody’s going to come to you looking for reimbursement — with interest charges tacked on. Government stimulus packages intended to “pump” capital into the economy to “create jobs” are nothing more than offers of free lunch. How so?
To answer this question, let’s first examine how a pump works. Take a water pump, for example. It’s obvious to everyone that the function of a water pump is to take water from one location and redistribute the water to another location. It’s also obvious to everyone that it’s not possible for the pump to create the water it pumps. Thus, to operate the pump, the suction side of the pump must be connected to the source of the water and the discharge side of the pump must be connected to the intended destination of the water. It is further obvious that the water pump cannot redistribute more water from its discharge side than it can take into its suction side. In fact, due to leaks in the system, it could redistribute even less water than it takes in. The government job stimulus pump operates in the same way. And, contrary to commonly accepted myth, there is no magic multiplier effect, nor can there be. Anything that appears be like it is strictly an illusion based on fallacious reasoning.
So, if the government intends to “pump” capital into the economy, it must first connect the suction side of its “job stimulus pump” to a source of capital. Only one source of capital exists; it’s the only place capital can be created, the private sector of the economy.
It now becomes readily apparent that, because government cannot create the capital it wants to pump into the economy, it can only suck the capital out of the economy from one place, in the form of tax, and redistribute it to another place in the economy, in the form of stimulus payments. But, wait! we mustn’t forget the inevitable additional costs involved in this process of redistribution of capital. Additional capital must be drained from the economy to pay for the design of the pump, the manufacture of the pump, the energy it takes to operate the pump, as well as the maintenance and repair of the pump. These additional costs are, of course, incident to the hiring of people to do all of those things, all of whom are paid with additional taxes taken from the private sector.
Because jobs follow capital (the intended result of a job stimulus package), the jobs that could have stayed in the private sector, where they would have increased the supply of capital, are instead shifted to the public sector, where they will consume the capital. The result of that is there is now less capital in the private sector. Because there is less capital, the rate of production of goods and services must fall. This, in turn, lowers the number of jobs needed. Thus, paradoxically, the job stimulus package causes the unemployment rate to rise in the private sector. Because the government will now pay unemployment benefits to those it threw out of work, even more capital must be sucked out of the economy to make the benefit payments.
A really practical way of thinking about it is to think of it as if you own a store. One night a burglar breaks into your store and steals your money from your safe. The next morning, the burglar comes into your store and buys a bunch of stuff with the money stolen from you and you’re supposed to think you made money off the deal.
The bottom line is, “there ain’t no free pump — I mean, lunch.”
To answer this question, let’s first examine how a pump works. Take a water pump, for example. It’s obvious to everyone that the function of a water pump is to take water from one location and redistribute the water to another location. It’s also obvious to everyone that it’s not possible for the pump to create the water it pumps. Thus, to operate the pump, the suction side of the pump must be connected to the source of the water and the discharge side of the pump must be connected to the intended destination of the water. It is further obvious that the water pump cannot redistribute more water from its discharge side than it can take into its suction side. In fact, due to leaks in the system, it could redistribute even less water than it takes in. The government job stimulus pump operates in the same way. And, contrary to commonly accepted myth, there is no magic multiplier effect, nor can there be. Anything that appears be like it is strictly an illusion based on fallacious reasoning.
So, if the government intends to “pump” capital into the economy, it must first connect the suction side of its “job stimulus pump” to a source of capital. Only one source of capital exists; it’s the only place capital can be created, the private sector of the economy.
It now becomes readily apparent that, because government cannot create the capital it wants to pump into the economy, it can only suck the capital out of the economy from one place, in the form of tax, and redistribute it to another place in the economy, in the form of stimulus payments. But, wait! we mustn’t forget the inevitable additional costs involved in this process of redistribution of capital. Additional capital must be drained from the economy to pay for the design of the pump, the manufacture of the pump, the energy it takes to operate the pump, as well as the maintenance and repair of the pump. These additional costs are, of course, incident to the hiring of people to do all of those things, all of whom are paid with additional taxes taken from the private sector.
Because jobs follow capital (the intended result of a job stimulus package), the jobs that could have stayed in the private sector, where they would have increased the supply of capital, are instead shifted to the public sector, where they will consume the capital. The result of that is there is now less capital in the private sector. Because there is less capital, the rate of production of goods and services must fall. This, in turn, lowers the number of jobs needed. Thus, paradoxically, the job stimulus package causes the unemployment rate to rise in the private sector. Because the government will now pay unemployment benefits to those it threw out of work, even more capital must be sucked out of the economy to make the benefit payments.
A really practical way of thinking about it is to think of it as if you own a store. One night a burglar breaks into your store and steals your money from your safe. The next morning, the burglar comes into your store and buys a bunch of stuff with the money stolen from you and you’re supposed to think you made money off the deal.
The bottom line is, “there ain’t no free pump — I mean, lunch.”
