For Krugman and others the answer always lies in still more government spending. America faces a “third depression,” Krugman warns, unless the government spends more—a lot more, perhaps up to $10 trillion. The Democratic leadership in Congress concurs, with the direction at least if not the amount. Senate Majority Leader Harry Reid, who has seen unemployment in his home state of Nevada rise from 5.3 percent to 14 percent (highest in the nation) since the first stimulus bill passed, says that we need a new stimulus to “create jobs and get our economy on track.”
But what advocates of increased government spending fail to realize is that government has no money of its own. Every dollar that the government spends must ultimately come from somewhere else. Every dollar that government spends is a dollar that is siphoned from American workers regardless of whether it is raised through debt or taxes. Taxes simply redistribute purchasing power, and do so in a particularly inefficient manner, reducing the incentives to produce or hire. Borrowing simply forces businesses and investors to anticipate higher taxes down the road.
As John Cochrane of the University of Chicago explains, “Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can't help us to build more of both. This form of "crowding out" is just accounting.”
Other countries are beginning to understand that there are limits to how long government can rob Peter to pay Paul. From Greece to Germany, from Great Britain to Spain, from Ireland to France, governments are beginning to scale back the welfare state, reduce budget deficits, and put their reliance in the private sector. Meanwhile, the U.S. plows ahead with more “stimulus” spending.
Albert Einstein famously defined insanity as “doing the same thing over and over again and expecting different results.” As Congresses rushes ahead with more spending, more regulation, more taxes, and more “stimulus,” it is a lesson they might want to consider.
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Michael Tanner is a Senior Fellow at the Cato Institute.