At The Ludwig von Mises Institute, Antony Mueller brings us this essay in which he explains that economic stimulus plans by governments divert valuable resources into projects that would otherwise be considered wasteful by most normal people. Cheap government cash tends to be spent in lots of different and bizarre ways. But few of them will add anything to our ability to actually produce things that we want and need. Thus any stimulus will end up being a short term rush at the expense of long term nourishment.
The problem is that the things that would give us real long term growth, by giving us more productive capacity, are robbed in order to give us the short term sugar rush promised by the social engineers. And money goes into projects that are abandoned once the government money runs out, because no one would have done these things without the government money in the first place.
And in the end we are poorer that we would have been.
The Austrian business-cycle theory emphasizes the problem of intertemporal misallocation due to monetary and fiscal stimuli. According to Austrian economic theory, stimulus packages induce the launch of projects that are bound to fail because their completion will be cut short by the lack of sustainable funding. In the short run, stimulus policies will bring an increase of the nation’s gross domestic product, yet what matters for long-term economic growth is not credit-induced demand but the nation’s capacity for production.
There is general agreement in the economics profession that the much-vaunted expenditure multiplier of Keynesian theory has quite different real and monetary effects depending on the state of the economy. However, the negative impact of stimulus policies on productivity is much less understood. When the economy expands due to fiscal or monetary stimulus, the productive capacity of the economy will actually decrease because the artificial expansion will mainly encourage malinvestment, i.e., the pursuit of business projects that are not viable in the long run.
It is easy indeed to fall into the trap of phony economic growth; as long as capacity utilization is below the normal level, demand expansions fueled by monetary and fiscal impulses increase economic activity. But the more the economy approaches full capacity, the more the effect on the production of real goods gets weaker and the effect on prices gets stronger. Eventually, this reaches the point when the monetary expansion only has inflationary price effects, and its impact on real production becomes nil.
