Dear Posterity,
Recently I’ve seen a number of people gleefully express their excitement at the prospect of receiving their stimulus checks from the government, with the latest round of government-relief funds passing in Congress for $1.9 trillion (an average of $1,400 per person). I hear impassioned cries for “putting Americans back to work,” “rescuing them” during the COVID-19 pandemic, or “stimulating the economy,” and while I agree with the principles behind these sentiments, I adamantly disagree with the means by which the government has sought to attain them. So what is so bad about these stimulus checks to Americans? Let’s take a look:
- Stimulus checks will require higher taxes. Where do governments get their money to operate? The taxpayer. How is the government able to afford a stimulus check? Your taxes. This means that for every $1,400 check being cut, you’re paying for it. This will necessarily destroy more jobs than it creates because the extra-heavy taxation lowers incentives for production.
But what if the government didn’t rely on taxes to pay for these stimulus checks? Let’s look at an alternate source of funding:
- Stimulus checks must rely on deficit financing (when the government borrows money). This means the borrowing must be repaid, and currently, the U.S. government owes $28 trillion (and counting). The government cannot keep piling up debt indefinitely. If it does, it means certain bankruptcy. This paints a dreary picture since deficit financing is built upon political pressures; therefore, it creates powerful vested interests which demand its continuance under all conditions. If no honest attempt to repay the debt is made, then governments must resort to inflation instead, which brings us to a third consequence:
- Stimulus checks will cause inflation. But what is inflation anyway?
“In economics, inflation is a general rise in the price level in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy” (Wikipedia).
In layman’s terms, inflation happens when things get more expensive (i.e. your money doesn’t go as far) as a result to the increased quantity of money that was put into circulation.
“To many, it seems obvious that if the government merely issued more money and distributed it to everybody, we should be all that much richer,” writes Henry Hazlitt, author of Economics in One Lesson. However, this is a most naive group. A second, less naive group senses that there must be a catch somewhere if the government could solve all our problems by merely printing more money, so they would limit the government to only print just enough money to make up for some “deficiency” or “gap,” as we are currently witnessing during the COVID-19 pandemic. However, both are wrong.
The Keynesians (those who support economist John Keynes) will argue that artificially introducing more money into the economy will stimulate exports, cure a depression to “get the economy going again,” and achieve “full employment.”
Still other eminent economists hold a rigid view that (falsely assuming the total quantity of money multiplied by its ” velocity of circulation” must always equal the total quantity of goods bought) the value of money must vary exactly and inversely with the amount put into circulation. In other words, “Multiply the quantity of money n times, and you must multiply the price of goods n times” (Hazlitt).
These groups are all wrong. Why?
A. An increase in the quantity of money raises prices. When people suddenly have more money, they will spend it; sellers will notice the increased demand for these goods and raise their prices, and because people have an artificial income increase, they will pay the higher prices rather than do without because their dollar has smaller value to them since they did not earn it…but this entire transaction was not based on an accurate, organic marketplace of free exchange. Eventually, people will seek out lower prices, choosing to spend their money on an alternate vendor. As a result, this vendor will recognize the increased demand, and the cycle continues until virtually the entire nation’s prices have raised. At this point, nearly everyone will have a higher (artificial) income, but the price of goods will have correspondingly increased, thus the nation will be no richer than before. The problem, however, is when the artificial income goes away, but the higher prices do not. Voila: inflation.
Inflation brings ruinous consequences for the whole community. It distorts the structure of production and leads to the overexpansion of some industries at the expanse of others, which means the misapplication and waste of capital. When the inflation is halted, which is never a smooth or gentle process, the misdirected capital investment (whether in the form of factories, office buildings, or machines) cannot yield an adequate return and loses the greater part of its value. It’s impossible to control the value of money under inflation. What’s worse, inflation does not harm everyone evenly. Henry Hazlitt explains:
Inflation does not and cannot affect everyone evenly. Some suffer more than others. The poor are usually more heavily taxed by inflation, in percentage terms, than the rich, for they do not have the same means of protecting themselves by speculative purchases of real equities. Inflation is a kind of tax that is out of control of the tax authorities. It strikes wantonly in all directions. The rate of tax imposed by inflation is not a fixed one: it cannot be determined in advance. We know what it is today; we do not know what it will be tomorrow; and tomorrow we shall not know what it will be on the day after.
Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering. gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.
B. They’re confusing “money” with wealth. It’s a common reason why one nation after another succumbs to the siren music of inflation. Money is the currency; wealth is what is produced/consumed (houses, food, churches, clothes, ships, railroads, pianos, and books, etc.). Purchasing power does not stem from the mere printing of more money; it stems from other goods (Whatever A produces, A exchanges it for the things that B produces).
C. An increase in money does not mean an increase in people’s ability to purchase more things…it takes two to tango: we cannot buy twice as many goods unless twice as many are produced, and this requires manpower, working hours, and productive capacity, not simply more money in people’s pockets to spend.
In its most basic form, the lesson we must understand is that we cannot receive a stimulus check without paying for it. And as we’ve seen, the means by which we’re paying for it is troublesome indeed. We have a rough few years ahead of us.
With every esteem and respect,
