Tuesday, February 10, 2009

As Obama Hustles the "Stimulus" Package, It's Time to Keep the Armey Curve in Mind

Dick Armey explains:

...despite Mr. Obama's campaign promises to adhere to "Pay As You Go" budgeting, no one seems terribly worried about paying for what will likely be a trillion-dollar stimulus package. What everyone should agree on is that the money has to come from somewhere, either through higher taxes, borrowing or printing.

If the government borrows the money for the stimulus, then it will either have to print money later or raise taxes to pay it back. If the government raises taxes to pay for the stimulus, it will, in effect, be robbing Peter to pay Paul. If the government prints the money, it will increase inflation, which will decrease the value of the dollar. That would, in effect, rob Paul to pay Paul back with devalued currency.

Taking money out of the private economy -- either through taxes or inflation -- and spending it in a way that doesn't offset the loss of money with real economic gains is worse than doing nothing.

Years ago I developed the "Armey Curve" to explain the negative burden government has on prosperity. The idea, borrowing liberally from Arthur Laffer's curve (which demonstrates that tax revenues fall when the tax burden gets so high that it no longer pays to work), is that at some point the burden of government spending exceeds the private economy's ability to carry it. "Stimulus" spending often does more harm than good, because it takes more money out of the system than it creates and thereby destroys jobs and leads to stagnation and diminished prosperity for all.
The above appeared last week as an Armey Op-Ed piece in WSJ. The full piece is worth reading as the emphasis is heavy on Keynes versus Hayek analysis.

1 comment:

  1. Surely the govt will go for the printing option - thereby generating inflation and reducing the debt that way (i.e., by reducing the value of the dollar and, therefore, the oustanding value of the national debt).

    I really cannot see a democratic govt redeeming debt on the scale it will rise to as a result of the successive wars of the last 10 years and the current plethora of bailout opackages. Ditto re the UK tbh.