When was the last time you ate money? When did you last wear it? Ever shelter under it during a storm? Fact is, money is only useful for purchasing the things we need. That’s the problem with yet more talk of a federal government “stimulus” in the face of state and local government-imposed economic disruption in response to Covid-19. Government stimulus simply means government is putting money in people’s pockets so we can buy things. But each and every thing we eat, use, and consume in our daily lives must be produced. That means “stimulus” is, at best, a temporary delusion. Give people money to spend that they don’t work for, sooner or later, there’s nothing left for them to spend that money on. Or, to rephrase Margaret Thatcher, “You eventually run out of other people’s stuff to buy.”
Producing is not fun to most people, for the simple reason that producing means work. Only a wonderfully blessed minority so love what they do for a living that they truly feel like they do not work to earn a living. Most look forward to the weekend and retire as soon as they feel like they can afford it. Producing – work – is therefore pretty easy to discourage. Cut somebody’s pay, even a little bit, and their productivity likely suffers considerably. Manage incompetently, and workers take advantage. Manage through threats and arbitrary practices, and people quit or passively resist work assigned by doing a poor job.
When it comes to production – the true source of ALL our prosperity – because most people don’t view it as fun, incentives critically matter. Not surprisingly, many workers rationally evaluated the situation and chose to take advantage of widespread confusion and overwhelming workloads in state employment agencies to quit their jobs, (fraudulently) apply for unemployment, take stimulus checks, and have a high time at everybody else’s expense.
Once state and local governments shut down the nation by imposing lockdowns on their constituencies and the federal government had no legal power to reverse these actions, it’s easy enough to see the quandary the federal government was in. No doubt, it seemed there was little to do other than attempt to spend the nation’s way to economic stability, and President Trump has made a fair point that many who were unemployed due to shutdowns had no choice in the situation. The problem, though, is that the path to prosperity is not through spending. It’s through production.
By the way, explaining this absolute truism and understanding how best to harness mankind’s productive instincts for prosperity was the real purpose behind Adam Smith’s 1776 tome, “An Inquiry into the Nature and Causes of the Wealth of Nations.” During Smith’s time, the prevailing thinking was that a nation’s wealth was directly related to how much gold it possessed. Of course, gold was the chief money of the day, and the truth is that gold’s inherent usefulness is only slightly less limited than that of paper money. The two ways nations gained gold were by conquering and by running large trade surpluses, often at the expense of colonies. This is the mercantilist system against which the American Colonies rebelled, declaring their independence, coincidentally, the same year Smith’s book was published.
Smith’s chief insights were that a nation’s true wealth lay in its productive capacity, and that a nation’s productive capacity was best built largely through free markets, not by government diktat, tax and subsidy incentives, or through regulation. A nation’s productive capacity includes its investment in technology, machinery, and infrastructure. Free markets, even in Smith’s mind, would not be entirely free of government rules, but he advocated they operate as freely as possible, for the sake of building productive wealth that would benefit everyone, whether rich or poor.
And Smith has been proven absolutely correct, although some economists bought into the ideas of John Maynard Keynes about the time of the Great Depression, which emphasized spending. Indeed, people with money to spend are an incentive for producers to produce EXCEPT when the government hands out money to everybody for doing nothing. We are all producers; all producers are people; all people are incentivized NOT to produce when money is handed to them for nothing. It’s that simple.
Federal stimulus payments made with money practically manufactured out of thin air is no way to ensure the nation’s prosperity. The only way to ensure prosperity is to allow people to work – to produce – and that means local and state government officials need to get out of the way and let us all do just that. Perhaps, if Covid-19 presented the kind of threat the hysterical press has proclaimed it to be, it would be different. Facts, however, belie the hysteria. And due to so many officials’ foolish responses, we are undoubtedly being made poorer for it, regardless of what a stock market pumped up by Fed money otherwise says.
The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.