The Government bubble.

On a recent post, I received a comment from Jack McHugh that caught my attention stating:  

 “The grievance is chronic fiscal irresponsibility, now become acute fiscal extremism.

 The target is an inbred, self-serving, self-perpetuating and bipartisan political class that no longer represents the will of the people.

 The goal is to send that political class packing and restore genuine representative government, with whatever policy implications that entails. (I wish I’d said that no. 45,648.)

 In following up I arrived at The Mackinac Center for Public Policy, which in their own words “is a nonpartisan research and educational institution devoted to improving the quality of life for all Michigan citizens. The Center assists policy makers, business people, the media and the public by providing objective analysis of Michigan issues and by promoting sound solutions to state and local policy questions from a free market perspective.” 

 In their Blog I found an article; “The Government Bubble” by Joseph G. Lehman which reminded me of a post “Do you believe in bubbles,” by Terje, and another, “Herd instinct and Crowds,” by Ron Kitching, which is about a different book but a similar theme, (crowd mentality.) For this reason I thought it might be of interest.

The Government Bubble

(Note: The following commentary appears as the President’s Message in the Spring 2009 issue of “Impact,” the Mackinac Center’s newsletter.) .

The best title for any book ever written may be “Extraordinary Popular Delusions and the Madness of Crowds.” Charles Mackay’s 1841 classic describes the growth and sudden collapse of some of history’s most ruinous investment bubbles. The recent credit and real estate bubble would fit neatly into Mackay’s narrative. If he were writing today, he would no doubt note a new government bubble that our tax dollars are rapidly inflating.

This government bubble is President Obama’s so-called stimulus plan and all the appurtenances thereto. The rush to tax, borrow and spend our way out of this recession has a bubble-like feel to it.

Using round numbers, the stimulus is (so far) a trillion-dollar expansion of federal spending. Heritage Foundation economists estimate the 10-year cost at triple that amount. That’s on top of our current $3 trillion annual federal budget which runs a nearly $2 trillion deficit. Compared to our $13 trillion GDP, we’re talking real money.

The stimulus is built on a Keynesian notion: The way out of a recession is for government to take from you the money you won’t spend and spend it. This was tried most famously during the lengthy Great Depression. President Franklin D. Roosevelt’s frustrated Treasury Secretary Henry Morganthau said, “We are spending more than we have ever spent before, and it does not work.”

Contrary to conventional wisdom taught in high schools, New Deal spending did not end, or even shorten, the Great Depression. Indeed, it may have lengthened it, as Lawrence W. Reed has argued in the Mackinac Center classic, “Great Myths of the Great Depression.”

Although economists differ on Keynes’s theories, they differ more on bubble theories. Bubbles defy precise definition. No theory satisfactorily explains why they grow. And since no one can predict how big they get or when they pop, bubbles are apparent only in hindsight. “Yep. That was a bubble.”

But here’s what we know. Bubbles are fed by people’s desire to get something for nothing, or at least get a lot for a little. The run-ups can seem nonsensical to some, but people invest anyway, often motivated by emotion as much as an actual understanding of the underlying investment. Bubble pops can bring other investments down with them.

Bursting bubbles destroy wealth. The destruction is worse when the invested wealth comes from borrowed money. And it’s worse yet when investments are forced, not voluntary.

Yet that describes the president’s stimulus plan in many ways. Unprecedented sums urgently bet on questionable theories, hyped by emotionalism and urgency, paid for with money taken from current taxpayers and borrowed from future ones.

Most people who lost fortunes in historic bubbles invested their own money voluntarily. No one was forced to buy overpriced Dutch tulip bulbs in the 1630s or Pets.com stock in 2000. But we and future taxpayers are on the hook for the stimulus.

The burst of a market bubble, though painful, can be a necessary corrective.  But what will it take to correct a government bubble? We must start by calling it what it is.

 

2 thoughts on “The Government bubble.

  1. No one was forced to buy overpriced Dutch tulip bulbs in the 1630s

    Perhaps not. But the government made it profitable to do so.

  2. Pingback: Extreme Thoughts in the Tea Party Aftermath | The Classic Liberal Blog

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