First I think we have to agree that a discretionary spending freeze would be a step in the right direction. If Obama follows through on this promise we should be willing to pat him on the back, “good job old chap!” and maybe even buy him a beer. Yes I know that it would only apply to 17% of the economy and that the entitlements, which are really sinking the ship, are left untouched, but I’m trying to be positive. After all, it isn’t every day that someone as ideological as Barack Obama steps back from the brink of radicalism.

But these are bizarre times in which definitions of words like “job creation” and “spending freeze” are not always clear and could be hiding something sinister. So we have to ask: What is a spending freeze anyway?

It’s a law being passed that forbids the increase in funding for any discretionary program, right? Except no report I see says anything about the spending freeze being statutory. “President Barack Obama intends to propose a three-year freeze in spending … ” says the Wall Street Journal. According to the USA Today the freeze will be part of the yet unreleased budget. But isn’t the budget supposed to be the thing being frozen, so it’s a little unclear (a) how a budget freezes itself and (b) why you would need one if it could.

Things become clearer (and yet foggier) if you read the WSJ article closely. A spending freeze, if not statutory, should at least mean the spending is held down across the board, right. Regardless of the perceived value of the program? Otherwise, you aren’t freezing the budget, you’re just freezing the programs you don’t like, which should happen every year anyway right?

But in the WSJ article we have this little nugget:

The administration officials said the cap won’t be imposed across the board. Some areas would see cuts while others, including education and investments related to job creation, would realize increases.

So a non-statutory (and probably non-binding) freeze isn’t even an across the board cap. It’s merely a pledge to prioritize spending, which should be done every year, but clearly is not.

So it appears, at least according to the press reports, that Obama is offering the American public a non-statutory, non-binding promise to cut a few programs to pay for the expansion of other programs, but overall saving the taxpayer “10 to 15 billion” in 2011 which is just about 0.7 percent of the projected Federal Budget Deficit in 2010.

Is that Hope and Change you can believe in or what?

“The bill, which funds most domestic federal agencies for the rest of this fiscal year, marks a 12 percent spending increase. Democrats said the spending was needed to counter neglect during the past eight years and that the money would act as another stimulus to create government jobs.” (Washington Times, Monday)

A trillion here, a trillion there, pretty soon it adds up to real inflation.

FEE Timely Classic:
“The New Deal and the State and Local Governments” by Robert Higgs

That the Obama administration based its policy on the assumption that every dollar of government expenditure has $1.50 worth of impact is a remarkable testimony to Keynes’s observation in that book: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

So it is that Keynes’s false expenditure-multiplier argument, severely criticized by his contemporaries, can now be invoked in support of massive spending.

The argument is founded on two key assumptions that turn out to be false. First is the notion that savings are not spent but rather are withdrawn from the expenditure stream. That assumption prompts stimulus proponents to believe that taxation or government borrowing expands total spending, while leaving the money in the private sector retards it. The flaw is the equation of saving with hoarding. People save their unconsumed income in bank deposits and mutual funds, purchase bonds (private or government) and stocks, or some combination of all of these. Thus savings are the sources of funds spent by borrowers. And as the classical economist most admired by Keynes declared: “No political economist of the present can by saving mean mere hoarding.”

That was Malthus, who was reaffirming Adam Smith’s explanation in The Wealth of Nations that “What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people.” Note that “to consume” does not only mean “to eat.” It also means to “use up.” Thus John Stuart Mill elaborates Smith’s explanation: “The word saving does not imply that what is saved is not consumed, nor even necessarily that its consumption is deferred; but only that, if consumed immediately, it is not consumed by the person who saves it. If merely laid by for future use, it is said to be hoarded; and while hoarded, is not consumed at all.” And when savings are borrowed by businesspeople, they are “all consumed; though not by the capitalist. Part is exchanged for tools or machinery, which are worn out by use; part for seed or materials, which are destroyed as such by being sown or wrought up, and destroyed altogether by the consumption of the ultimate product. The remainder is paid in wages to productive laborers, who consume it for their daily wants; or if they in their turn save any part, this also is not, generally speaking, hoarded, but (through savings banks, benefit clubs, or some channel) re-employed as capital, and consumed.”

Keynes’s lack of formal training in economics, besides his eight weeks of tutorials from Alfred Marshall, may explain his failure to interpret correctly Marshall’s own restatement of the meaning of saving, which Keynes himself quoted: A man “is said to spend when he seeks to obtain present enjoyment from the services and commodities which he purchases. He is said to save when he causes the labor and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.”

The Government Spending Shuffle

The multiplier’s second incorrect premise is that government expenditures are “autonomous”; that is, government spending does not depend on current income. It may be true that politicians pay hardly any attention to the level of income in the economy when they choose how much government should spend. That it planned to spend $787 billion when the economy was in a recession is ample testimony to such an inclination. But the amount the government spends comes primarily from taxes paid out of the public’s current income. Furthermore, government expenditures above tax receipts have to be paid for through the sale of bonds, purchased out of the public’s savings. Thus increased government spending simply shuffles around currently earned incomes and savings without adding anything to total spending. And when government shifts more of current income toward its favored expenditures, the economy’s future functioning is impaired because such spending yields less than would have resulted had the income earners spent the money themselves.

Borrowing from the rest of the world may add to total spending in the United States at the expense of spending in some other countries. But it is hard to conceive of foreign savers eager to send their unspent incomes to the United States when their own economies are experiencing recessions. Besides, the Keynesian multiplier idea is supposed to hold in every country. Thus it is unrealistic to expect that all governments would be able to increase their borrowing from “the rest of the world” in order to increase total world spending.

Borrowing from a central bank (inflation) may increase total spending beyond currently generated incomes. However, the stimulative effect can only be temporary, until nominal wages adjust to the resulting rise of prices and participants in the capital markets have taken measures to hedge against future capital losses. This is the classical forced-saving doctrine that Keynes read but failed to interpret correctly, thinking it applies only to an economy operating at full employment.

Indeed, David Ricardo described as an “absurdity” the belief in the ability of a central bank to promote lasting economic prosperity by issuing paper money. The belief, he said, attributes “a power to the circulating medium which it can never possess.” Keynes encountered a similar warning about the futility of a central bank’s money creation to promote prosperity in Ricardo’s Principles but unwisely dismissed it as having relied on the assumption of full employment. The Federal Reserve evidently has been attempting to prove Ricardo wrong with its reckless money creation, especially since the third quarter of 2008. It has lost so far.

Production Drives Economies

A fundamental flaw of the Keynesian multiplier argument, besides the two faulty premises, is its failure to recognize that consumption spending follows production and the earning of income. It is incorrect to think of spending as one consumer handing over a fraction of her income to another to spend. Rather, individuals engage in production from which they earn incomes by selling what they do not consume. From the incomes thus earned, individuals purchase goods and services they themselves do not produce. The remaining income may be held in cash (hoarding) or turned over to others through purchasing interest- or dividend-earning assets (saving). That is why the classical economists emphasized that production, rather than consumption, drives an economy, another explanation Keynes encountered from Mill but could not interpret correctly:

What constitutes the means of payment for commodities is simply commodities. Each person’s means of paying for the productions of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because everybody would have twice as much to offer in exchange.

Before Keynes borrowed Richard Kahn’s formulation of the expenditure multiplier, founded on consumption expenditures, other analysts had argued the “multiplying effect” of production, as Mill explains above. The argument is that increased productivity or a surge in production within one sector of an economy stimulates increased production in others as a result of the additional demand or income generated by that sector. Thus the discovery of high-yielding varieties in agriculture or the introduction of more advanced information-processing technologies into computers may have multiplying effects on production in other sectors of an economy. That explanation is a far cry from the Keynesian belief that by taking some of the public’s income to subsidize the arts, pay the unemployed over an extended period, or cover children’s health care, government will stimulate increased production in the rest of the economy. Even necessary expenditures on infrastructure entail forgone production. For a correct analysis, one always has to keep in mind the displacement effect of government spending.

Among Keynes’s contemporaries who criticized his multiplier argument most consistently was R. G. Hawtrey, who declared it variously as “practically untenable, . . . nonsense, . . . [and] fallacious,” and said that it does not represent “a correct account of the sequence of events.” (See more of such criticisms in my “On the Mythology of the Keynesian Multiplier,” American Journal of Economics and Sociology, October 2001.) Evidently, those who recommend massive government spending have paid little heed to previous criticisms of the multiplier argument. They presumably were impressed by its expression in algebra and geometry in modern macroeconomics textbooks. They also have not learned from the failure of former President Bush’s tax cuts of 2008, which were meant to stimulate consumer spending and spare the economy from a downturn. Cutting taxes, only to borrow from the public to fund the increased deficit, could not have increased production. Perhaps the failure of the so-called stimulus to bring economic recovery will finally teach the right lesson on the impotence of increased government spending.

Economic recessions typically are the result of a mismatching of production with consumer demand. Given the incentives of producers to correct their own mistakes to recover profitability, economies sooner or later recover from recessions on their own. But recovery can be forestalled when governments undertake expenditure or regulatory measures that frustrate the corrective actions of private producers and consumers. Massive, diversionary spending by government does not help the recovery process.

Does America’s tax and subsidy system ignore the commandment, “Thou shalt not steal”?

During the 1930’s, certain American intellectuals spearheaded what might be called an ethical uprising in the social realm. They called for government intervention to benefit the less fortunate members of society, giving impoverished persons and groups the practical help of subsidies, price supports, and other monetary payments.

The idea, as everyone knows, proved immensely popular. Earnest political officials saw in it a chance to extend their sphere of usefulness: now government, instead of merely restraining evil-doing, actually could do good. Many social scientists and other kind-hearted citizens likewise approved, thinking: “What a fine thing it is that Washington is helping the needy!” And those who received the aid—farmers, the elderly, the unemployed, citizens of “poor” states, and so on—saw the tangible benefits to themselves.

Considering these pressures, the growth and persistence of the large-scale practice of distributing subsidies is quite understandable. But, I believe—despite the widespread acceptance of this system—that the entire practice would be opposed by tremendous numbers of our people, even by many now receiving substantial government payments, if they understood what is really going on, including secondary consequences. We have looked only at the immediate effects of a policy, or the effects on only a certain group, and failed to examine the long-term effects, not merely on one, but on all groups.

Of course, we see that various segments of the population have special economic needs. We also see that the federal government has, or can get into its possession, the vast funds which can meet those needs. But we stop there, when we should go on and ask: “Where does the government get this money?”

The Magic Money Machine

It’s quite possible that some citizens don’t know. But even those of us who do are tempted at times to look at our federal government and imagine we see a fabulous, gold-plated Magic Money Machine. We are tempted to believe, somehow, that if only our legislators will work hard enough turning the crank, this magic machine will produce all the wealth needed by every impoverished group in our society.

And a great many persons are busy encouraging us in this illusion. Our politicians promise ever-larger bounties from the magic machine: bigger dams, better roads, better schools, more federal housing projects, higher parity prices. Many of our professors tell us this is social progress and social justice. And many of our journalists inscribe headlines announcing every new proof of federal generosity.

It certainly would seem that the Magic Money Machine is the wonder of the age.

Yet, we can search Washington, D. C., from the subcellar of the White House to the top of the Capitol Dome, and we will not find a Magic Money Machine. It does not exist. Of course, the government can always print more money—it can always dilute the currency. But there is no federal-ly-owned gold mine in the nation’s capital. Neither the President nor the congressmen nor anyone else in Washington has any self-replenishing treasure house from which wealth can be taken and distributed to the people.

Where Does the Money Come From?

Where, then, does our federal government get the billions upon billions which it doles out in subsidies each year? It’s obvious enough. From the people, from taxing everyone actively engaged in producing wealth. Government has no wealth of its own which it could give to you or me or anyone else. Every time the government gives to one man, it has to take from another. Every time someone gets something for nothing, someone has to give something, and get nothing. Government can pay Paul only by first robbing Peter.

Now I have just used a strong word—“robbing.” I said, in effect, that our government is robbing one citizen in order to give to another. This is a well-considered conviction. And yet, it is perhaps too harsh an indictment.

For one thing, I believe most of those involved (the subsidy-seekers and the government officials) don’t know that they’re stealing. It’s not intentional theft. Also, it is apparent that the government practice of taking from some in order to give to others is perfectly legal. Even if it is unconstitutional, government passes the laws enabling it to do this taking; so, legally, it cannot be called stealing.

But the moral law and the man-made law are sometimes two entirely different things, and in the end, man-made law has wisdom and validity only to the extent that it coincides with moral law.

The Moral Law

So let us evaluate our practice of taxing-some-to-subsidize-others in terms of the moral law which says, “Thou shalt not steal.”

Now, most of us are used to thinking of stealing as occurring unexpectedly, and either secretly or by means of violence; and we ordinarily think of this stealing being done by an obviously unsavory character, and for an unmistakably selfish end—his own self-aggrandizement. But I think you will agree that we can eliminate every single one of those conditions, and still have stealing. The dictionaries agree that two elements—and only two elements—are always present in theft: the element of taking (that is, getting without permission) and the fact of ownership (that the thing taken belonged to someone else).

In terms of this basic definition, our government’s tax-and-subsidize program is stealing—if (and this is an important “if”)—if you actually own the fruits of your own labors, and if you do not want government to take them from you in order to give them to others. All we have to find out is whether you really own what you earn, and whether you would voluntarily let government take what you own and distribute it to other persons.

Do You Own What You Earn?

First, do you own what you earn? Do you own the fruits of your own labors? This is a big question, and I can only touch on it here. But I will take the time to say that this question is pretty close to the heart of the gigantic struggle of freedom versus slavery which is now engulfing the world.

On one side is the socialist, the communist, the totalitarian position. It says: “No, no man owns the fruits of his own labors. Society owns them, and it is the business of government to distribute them.”

In the center is the “moderate collectivist” or “middle-of-the road” position: “A man should be allowed to keep part of what he earns. The rest belongs to society, to be collected and distributed by government.” But this is only an evasion of the point. When you say, “A man can be allowed to keep part of his income,” you are virtually admitting that government owns all of it, and that government alone, by its own generous discretion, decides that some part of it may be kept.

On the other hand, the voice of freedom asserts, “Man inherently, under the divine or natural laws, does own the fruits of his labors.” This ownership hinges on the simple fact that man has a God-given right to life; and the right to life is meaningless unless there is the right to sustain and protect that life. If a man is denied the right to keep what he earns, to retain the fruit of his labor or his property, he loses control of the only means whereby he can sustain his human life!

This, incidentally, is a premise on which this country was founded. Throughout history, nations had been built on the assumption that the State was supreme, the people subordinate—and that the State had prior claims on every man’s income. But the American Revolution (which was primarily an ideological revolution) overthrew these tyrannical assumptions; and the Declaration of Independence and the Constitution implied that the individual is supreme, the State subordinate—and that the function of government is to protect a man’s life, liberty, and property, not to take them away.

What Would You Give Government?

Assuming that you should own what you earn, then the question arises: Would you voluntarily give to government any amount of your income that it wanted, even though you knew it was going to be used for the sole purpose of subsidizing others? This is not a question of charity—how charitable you want to be—but a question of whether you would voluntarily give up the right to determine how your income, above and beyond your immediate basic needs, is going to be spent. It is a question of whether you think you should relinquish that right to certain other persons called “government,” or whether you should determine the spending of your own earnings—how much for your family, how much for various benevolent purposes, and so on.

I am not asking whether you would be willing to pay for a basic protective service which government renders for you at your request. I am talking about an additional tax, on top of that, which is not for you at all, but for somebody else.

We might call one part of our present tax the basic tax; the additional part, a subsidy tax—a tax we pay in order to subsidize others. I say that even though we pay the basic tax reluctantly, most of us pay it pretty much voluntarily. That is, we know we ourselves want a certain service from government, and we know it has to be paid for. But I believe many of us—if asked—would not be willing to pay an additional tax for the sole purpose of transferring our wealth to someone else.

Suppose that only the basic minimum tax were compulsory in this country and that there were no subsidy tax. And let us say that the Governor of Tennessee had come to you and asked you to put up some money to help build the TVA dam. Not aloan—an outright gift.

You know, of course, that the dam is primarily for the benefit of the people of the Tennessee Valley. You also should know that if you give the Tennessee Governor money one year, he’ll be back for more the next; and he and his successors in office will keep on coming back till the day you die.

The Word Will Spread

Furthermore, if you give a single dime for the TVA dam, the word will spread like wildfire that you have subsidized something in Tennessee; and the governors of the other 47 states will be after you faster than you can say, “My poor aching wallet.” And so will you be approached by everyone else who thinks it might be nice to have a subsidy—to get something for nothing.

The wheat farmer, the corn farmer, the peanut farmer, the unemployed, the unemployable, the elderly, the veterans, all who want improved roads and hospitals and schools and dams and harbors and irrigation projects and the thou-sand-and-one other things that occupational and geographic groups in towns and cities and states can ask for—by the hundreds they’ll come—knocking at your door, writing you, phoning you. They’ll never let up. Their imagination and persistence will prove unlimited.

Knowing full well that this is the pattern—would you voluntarily, on your own initiative, help to subsidize the TVA dam, or any other project seeking government aid?

Before you say yes, let me state that the situation I have just portrayed is literally what did happen to our United States congressmen during the past 20 years. A few congressmen, urged on by certain pressures, put through a subsidy for one group, who promptly concluded it was something government owed them, and have literally demanded it ever since.

Other groups, seeing the pleasures of “something for nothing,” shouted, “Me too!” After all, they reasoned, “You are the government—you’ve got to be impartial! You gave to Tennessee—why not to me?” And the subsidy-seekers have been swarming around the nation’s capital ever since. Almost every year they take a bigger cut out of your and my earnings.

And who determines how the loot is divided? We like to imagine it is some cool deliberative body—“government” in the abstract, dispensing “economic justice” according to the dictates of impersonal science and impartial wisdom. But what is actually going on? Pressure groups are fighting like cats and dogs to see who can get the biggest shares of the something-for-nothing money. And congressmen are perpetually making deals with each other—“You vote for my subsidy and I’ll vote for yours.”

Now this is what we bargained for when we started this subsidy business. Increasingly, everybody is subsidizing everybody—and government, rather than the individual citizens, is determining how individual earnings are spent. The whole problem was implied the very first time we let government step in and take wealth from one in order to give to another. So I ask you, “Voluntarily, on your own initiative, if you were acting as government, would you have started this subsidy operation with a contribution from your own income?”

If you say, “No, I would not”—and if you have already agreed with me that you own the fruits of your own labors—then I think you are concurring with me that the subsidy program is virtually a form of stealing. Unintentional? Perhaps. Legal? Yes, though actually unconstitutional. But still it would seem to me, by the judgment of moral law, inherently an act of theft.

Government Camouflage

Why, then, is it not more commonly recognized as that? Largely, I think, because the mechanics of government tend to camouflage what is going on. Government processes are so automatic, so mechanical, so impersonal, that it is easy to lose sight of what is actually happening.

The whole picture would become startlingly clear if we would remove the mask of government procedures, and reduce the situation to its basic human elements. Let’s take the farmer who demands a subsidy. Ostensibly, he asks it of government; but actually, he requests it of his fellow citizens. He is virtually saying to them, “I insist that you pay me more than the free market price for what I raise. I demand that you pay me more than you would voluntarily.”

If the farmer said that to each of his customers in person, they’d just laugh at him. So the farmer asks government to provide a subsidy. Instead of collecting that subsidy through taxes, what if the government said to each farmer, “You go and collect this subsidy yourself. We will assign a policeman to each farmer, and you can go door to door all over the United States, and demand your price support in person. If anyone refuses to give you his share, the officer may arrest that person and take him to jail.”

Even if the government subsidized the farmer during this tedious collection process—and paid all his traveling expenses—how many farmers do you suppose would be willing to accept price supports under such conditions? Why, it would be too humiliating, too degrading to go about begging or bludgeoning one’s fellow citizens. Any normally self-respecting farmer would refuse to do it. He would see for himself that he was engaged in an act of theft, and would turn from it with loathing.

Morals and Economics

“All right,” someone says, “I’m beginning to see your point. Reduced to its basic moral and human elements, this subsidy business might be called stealing. But even though it is morally regrettable, is it not economically advisable? Don’t you agree that from the viewpoint of practical economics, it makes more wealth available?”

That’s a good question. But the answer is that the subsidy system is not economically advisable. There is a most interesting and significant correlation between morals and economics. What is morally sound tends to be economically sound, and vice versa; and this applies very pointedly to government subsidies. For the people as a whole, the subsidy system does not increase wealth, but only transfers it, and in the process greatly reduces it, and takes away precious freedoms.

How Can It Be Stopped?

If the subsidy system is wrong, then how can it be stopped? The answer is simple. We can solve this problem by recognizing that just one thing makes it possible: government intervention, the present misguided notion that government should dispense economic privilege. Left to their own devices, our people would never think of taking from one another in such fashion. Even if a neighbor offered to steal for him, no honest man would accept a gift of stolen goods. And if such wholesale thefts were attempted without State sanction, the police and courts would halt it faster than you can yell, “Stop, thief!”

We find the answer close to home—in the kind of political instrument conceived by our own Founding Fathers. We find it in the spirit of limited government crystallized in the Declaration and formalized in the Constitution. Under this system, the political mechanism has no power to bestow favors on any class or section—rich or poor, business or labor, city or farm, North or South. It has no authority to take from one to give to another, no authorization to interfere with the normal functioning of the free market. In this sort of society, charity is voluntary, and can be both individual and institutional; but theft in all forms is absolutely illegal. The commandment, “Thou shalt not steal,” is remembered and obeyed.