Milton Friedman on why the Stimulus will fail, (Part 4), Do you want your grandchildren to pay for your walking bridge?

Milton Friedman – Government’s Role 1/4

TWO RIVERS BRIDGE: Opening nears.

People just don’t understand how wasteful government can be and how giving government more control of our lives destroys much of the freedom that we should have. This series on the stimulus demostrates these points. This whole series started because of a post I did on July 6, 2011 about an post in the Arkansas Times Blog.

On July 6, 2011 on the Arkansas Times Blog I posted concerning the walking bridge in Little Rock that stimulus funds help build:

Tim Griffin spoke in Central Arkansas recently at a townhall meeting and mentioned that a couple of million of stimulus money went to build the walking bridge in Little Rock that will be opening this summer. Then he went on to show how it was silly for our government to try to stimulate the economy with our national credit card.
Steve Chapman rightly noted in his article “Stimulus to Nowhere” noted:

The federal government took out loans that it will have to cover with future tax increases … so states don’t have to. It’s like paying your Visa bill with your MasterCard.

The person using the username “Arkansas Panic Fan” responded:

Bridge = good stuff for Central Arkansas. Not sure why it is a bad thing. It is your money at work here being used for your benefit. I applaud this type of government activity. This is the type of project and progress you can see, touch, smell, hear.

That being said, Saline Republican, is this a waste of your money? You can use it as you wish.

__________________________________________

The stimulus came about because politicians believed they had to stimulate the economy by flooding the economy with stimulus dollars and President Obama is forcing one of his cabinet ministers to come down here to Little Rock to get credit for the walking bridge, but I guarantee you the fact that unemployment has risen from 8.1 % to 9.2 % today since the stimulus was passed will never be brought up. I found an article from Milton Friedman from 2000 that shows why a stimulus like this will not work. Here below is a portion of the article. I have also posted some video clips by Friedman discussing the proper role of government.

An increase in government spending clearly benefits the individuals who receive the additional spending. Considered by itself, it looks as if the additional spending is a stimulus to the economy.
 
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■Additional taxation. In this situation, the dollar cost to the persons who pay the taxes is exactly equal to the dollar gain to the persons who receive the spending. It looks like a washout.

Getting the extra taxes, however, requires raising the rate of taxation. As a result, the taxpayer gets to keep less of each dollar earned or received as a return on investment, which reduces his or her incentive to work and to save. The resulting reduction in effort or in savings is a hidden cost of the extra spending. Far from being a stimulus to the economy, extra spending financed through higher taxes is a drag on the economy.

This does not mean that the extra spending can never be justified. However, it can only be justified on the ground that the benefit to the people who receive the spending, or to the community from the activity to be financed by the spending, is greater than the direct harm to the taxpayers plus the hidden cost. It cannot be justified as a way to stimulate the overall economy.

■ Government spending financed by borrowing from the public. Individuals who purchase the securities that finance the additional expenditure would have done something else with the money. If they had not purchased the government securities, they presumably would have purchased private securities that would have financed private investment. In other words, government spending crowds out private investment. At this level, it is again a washout: those who receive the extra government spending benefit, but the private investors, who are deprived of the same amount of funds, lose.

But again, that is too simple a story. The overall effect is an increase in the demand for loanable funds, which tends to raise interest rates. The rise in interest rates discourages private demand for funds to make way for the increased government demand. Thus, there is a hidden cost in the form of a lowered stock of productive capital and lower future income.

The Keynesian view that the spending is stimulative assumes that the funds the government borrows would not otherwise have been invested in the private capital market, but came simply from cash held in hoards by individuals   from under the mattress, as it were. In addition, it assumes that there are unemployed resources that can readily be brought into the work force by activating the excess funds held by individuals, without raising prices or wages.

That is a possibility in some special cases, such as the Great Depression in the 1930s, when there had been a major reduction in total output and prices were very far from their equilibrium level. More generally, however, theory suggests and experience confirms that government spending financed by borrowing from the public does not provide a stimulus to the economy.

Japan provides a dramatic recent example. During the 1990s, the Japanese economy was depressed. The government tried repeated fiscals stimulus packages, each involving increases in government spending financed by borrowing. Yet — or maybe therefore — the Japanese economy remained depressed.

 

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