Hornberger's Blog

Hornberger's Blog is a daily libertarian blog written by Jacob G. Hornberger, founder and president of FFF.
Here's the RSS feed or subscribe to our FFF Email Update to receive Hornberger’s Blog daily.

Why Not Revitalize the Economy with Pyramids?

by

Statists continue to argue that to dig its way out of its welfare-warfare financial crisis, U.S. officials should continue to spend massive amounts of money. The problem, of course, is that the U.S. government doesn’t have massive amounts of money. What it is already spending far exceeds what it is receiving in the form of taxes.

So, how do statists propose that government officials get the difference in order to cover its spending? In two ways: borrowing and inflation. They say that the spending of that borrowed or printed money will “revitalize” the economy, thereby bringing jobs to unemployed people who then will be paying the taxes to fund the welfare-warfare state. Happy days will be here again.

The statist arguments, however, are false and fallacious and lead in but one direction: economic doom, the same type of economic doom that has now hit Greece, where the government is, for all practical purposes, bankrupt — unable to pay its bills, unable to borrow the money to do so, unable to print the money to do so, and lacking a sufficient private base of wealth to tax.

In any society, there is a finite amount of capital. Let’s take a small, very poor nation, one in which people, say, have a total savings of $1,000,000. That’s all the money there is for capital.

Things are going well within the nation. Business is booming. Private business owners decide to expand operations by investing in equipment that will make their businesses more productive. This will mean more revenue for the firm, enabling the payment of higher wages, as well as lower prices for consumers.

To borrow the $1,000,000 that savers in the nation are willing to lend, the firms decide to issue bonds carrying an annual interest rate of 10 percent, which is the most they can afford to pay.

But just before the bonds go to market, government officials enter the picture and announce that they are going to embark on a massive public works campaign entailing the building of pyramids. They issue government bonds with an interest rate of 20 percent, twice what the private firms are offering. The savers decide to lend their money to the government.

The government uses the money to build its pyramids. It offers jobs to construction workers all over the country. New businesses spring up around the pyramid operations, such as restaurants, car dealerships, and clothing stores.

Government officials, along with the mainstream press, celebrate all this economic activity. “Jobs for your nation!” they proudly declaim “We’re the key to economic prosperity!” When the pyramid is finally finished, they proudly point to the tourists who come to visit it.

But there is something important that is missing here. It’s easy to point to the pyramid, the restaurants, the car dealers, and the tourists. But it’s not as easy to see all that is unseen: all the things that did not come into existence owing to the fact that the private businesses were prevented from borrowing the $1,000,000 in capital to expand their operations. Their level of productivity does not grow, which means no wage increases for the workers and no price decreases for consumers. The money that would have gone into private business expansion was used for the construction of a pyramid.

Moreover, the government is now saddled with $1,000,000 in debt that must now be paid back. Where does it get the money? From the people in the nation (including the savers) — through taxation.

What happens if tourists don’t come to visit the pyramid? Building a new pyramid obviously becomes problematic. But lots of people have become dependent on the pyramid business. Construction companies and suppliers engaged in the building of the pyramid start to go out of business. The same goes for all the nearby restaurants, car dealers, and clothing stores. That means massive unemployment.

In other words: recession or even depression! The statists cry, “Do something! Save us from recession and depression! Spend more money! You can’t stop now. You must continue doing it to keep the economy going. Borrow the money or print the money, but just keep spending.”

Thus, each year the government builds a new pyramid, and each year more and more businesses become oriented toward the pyramid operations. But finally, one day the government’s debt has become so large that people won’t lend it their money, fearing that they won’t get paid back. And there isn’t enough wealth in the nation to tax.

Nonetheless, the statists cry, “Save us from recession and depression! Keep spending money.”

Government officials respond, “We don’t have the money to spend. We’re flat broke. We can’t raise the money through taxes because people are flat broke too.”

Statists exclaim, “Then just print the money you need for new pyramids. Just don’t stop spending. Save us from recession and depression!”

And that’s when the inflation begins, the insidious process by which government plunders and loots people not through direct taxation but rather by debasing the value of their money. That’s when prices of most everything start soaring.

Finally, at the end of this long process, the government is broke, the people are broke, economic activity has come to a standstill, and there is no more savings in society. The Big Depression has finally hit.

What do the statists say then? That’s when they blame the whole thing on free enterprise and call on the government to nationalize and own all the gold, industry, and everything else in society, including, of course, the pyramids.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.