One of the arguments I've noticed flying around the blogosphere lately by uninformed (I say uninformed because I do believe they've been legitimately misled by politicians and their court economists - this isn't entirely their fault) individuals is that the stimulus payments will help us fly out of the global financial crisis ahead of the rest of the world and put us in a great position to pay off the debt 'down the road'. These individuals have debated with themselves two perceived alternatives: one, to plunge along with the rest of the world into the depths of the global financial crisis; or two, take on (public) debt and 'stimulate' our way to prosperity, only to worry about the debt during the next 'boom' when it will be far easier to repay.

The first misconception, or fear, that we'll plunge further into the doldrums of the crisis if no 'stimulus' is undertaken by the government is only partially true. If the government sat on its hands but continued to take tax and other revenue from the people (while 'doing nothing'), less resources would be available for the people to spend, save and invest and therefore the economy would be worse off. The appropriate action for the government to take is an immediate reduction in taxes aligned with a cut in spending. This would provide the private sector with additional capital that they can then use in line with consumer preferences and 'stimulate' the economy (unlike government spending which is more often than not wasteful and not in line with preferences). The cash handouts issued by the government were nothing more than wealth redistribution disguised as good policy as the majority of tax revenue is collected from the top echelon of Australians, the very people who saw none of the stimulus.

While the fear of inaction is partially justified, the response of the incumbent government was not and is nothing more than political opportunism of the lowest form. At the end of the day, regardless of how many flawed economic models or cherry-picked statistics the government produces to justify itself, every dollar 'injected' into the economy must first be taxed or borrowed out of the economy. Thus, as mentioned earlier, it's nothing more than income redistribution. It does nothing to increase productivity or employment and therefore nothing to create additional income - and that's the best case scenario! More likely, government expenditure will weaken the private sector by directing resources toward less productive uses (e.g. more consumption and less productive investment) and thus impede economic growth.

Before moving on to the issue of deficit spending, I would just like to address one obvious argument that always seems to arise: that government spending takes from 'savers' and gives to 'spenders' which produces multiplier effects (more spending, growth), ad nauseum. To answer this justification of government spending, lets look at two types of savings (obviously there are more - real estate, shares, and so on, but that's irrelevant here): one, people simply hoard cash in their mattress; and two, people 'save' it in a banking deposit account. In the first case, the only way someone could believe that this would be bad for the economy (result in a 'deficiency' of aggregate demand) is if there exists confusion between 'money' and 'wealth'. If people accumulate money for the sake of accumulating wealth (e.g. stuffing it in their mattress never to be seen again), the price of commodities will continue to fall relative to money, therefore 'deficiencies' in aggregate demand will never result. If there is less money chasing the same number of goods, everyone else holding money will benefit through an increase in their purchasing power. The second case on the other hand is more straightforward, with any money deposited in banks being subsequently lent to others to spend. So regardless of what people do with their money it will be used!

To move on to the second claim that a deficit is not an issue because it will be easy to pay off in the future, let’s take a look at the area where there is an apparent "consensus" amongst economists: deficit infrastructure 'investment'. It's true, our highways are probably collapsing; our schools are dilapidated and badly in need of upgrades; and our public transport systems are third world. But the solution is not more tax dollars funnelled into this bottomless pit of bureaucratic waste. These services should be privatised: yes, roads, rail, buses, all of the so called 'social' infrastructure should be placed in the hands of the market, the only system that is capable, reliable and efficient enough to own and operate them. The fact that most people can't even consider private roads (beyond the token quasi-private toll roads) shows how effective the government run education system has been at manipulating and misleading people with false economics, filling the minds of entire generations with an inert fear of the market and into believing the fallacy of "public goods". Privatised infrastructure and the market price system - aligning investment with the preferences of the people rather than bureaucratic whims - is the only way to avoid further infrastructure waste.

That issue aside, lets examine the claim that infrastructure is one of the best ways to 'stimulate' the economy. The first claim is that it creates thousands of jobs, but one need not look far to show the stupidity of this idea. Yes, infrastructure will create jobs, but only because it is displacing them from where they are more urgently needed (it's impossible to tell if they are actually needed in infrastructure because that sector of the economy is socialised and is therefore guesswork at best - the price system is the only efficient method of allocating labour and capital). The only way the government can create these jobs is by taking money from the private sector, thereby replacing efficient jobs (that may well never be created) with inefficient and unsustainable jobs with the overall gain to the economy quite possibly negative! Only by chance can the government stumble onto a productive investment that increases future growth and productivity, but the amount of capital that is certain to be wasted in other projects will more than offset the potential gains.

The idea that these projects are justified because they're funded with borrowed dollars instead of tax dollars is equally ludicrous. The money from deficit spending has to come from somewhere and as the government produces no wealth of its own, we either have to print the difference, raise future taxes or do a bit of both - all of which hurts the economy. By borrowing, the government raises interest rates for the private sector, restricting the available capital for business. If they decide the debt is too hard to service with future tax dollars alone, they will start printing, resulting in inflation that takes real value away from the private sector and anyone who holds dollars. Whatever the government does to finance the deficit they will crowd out private investment and waste resources through countless pet projects, pork barrelling and other bureaucratic waste.

Finally, there is often a claim that there are "idle resources", in other words unemployment in the economy and that government deficit spending helps to re-employ them. The problem with this, as Henry Hazlitt clearly outlined, is that "...unless there were some serious lack of coordination among prices, costs, and wages, mass unemployment would not exist in the first place. When it does exist, the only appropriate cure is individual adjustment of prices, costs, and wages to each other - the return of coordination. But this can be brought about automatically only if the competitive forces of the market are given free play." Allowing these forces to work by removing their causes - government intervention - is the road to recovery, not the foolish notion that more wasteful debt and spending by government will somehow fix our economy.

When Wayne Swan claims that his spending will still be "flowing through the economy" for ten years, he's correct: his reckless spending will alter future economic growth for the worse. Economic growth results from producing more goods and services (not from redistributing existing income), and that requires real savings and productivity. We're going to be paying for the reckless socialist policies of this government for many years to come and only when people begin to realise the fallacies behind big government, stimulus and deficit spending do we have a chance at reversing this course.