Mailvox: the government as economic actor

BT wants to know the difference between government stimulus and private investment:

I know you are vehemently opposed to the government intervention in free market. Now, I understand what can happen if Government dictates the prices and directly regulate demand and supply like the old communist countries. But what is wrong with government playing as yet another individual player in a free market? For example, can we not consider the stimulus package just like an investment from a private party? I believe that if a wealthy individual throws in 700 billion dollars into the market, that can indeed pull up a sinking economy. So, why not the Government act as such an individual? I guess the discussion should be more about the source of the Government funds. If the 700 billion is something that Government “saved” from the tax money, then it is “good money” that cannot devalue the currency and hence the stimulus is good. On the other hand, if Government prints these 700 billion, then currency gets devalued. But again, if this surplus 700 billion can create an economic activity that nullify the price devaluation, then printing money is also worth it, right?

The reason is two-fold. First, government money doesn’t come from nowhere, it is either taken out of the private economy or printed. Printing the money is bad because it directly reduces the value of money through inflation. It would have to generate at least $700 billion in new economic activity just to break even; since the calculated multiple of World War II government spending was 0.8, this means that inflation-based government spending is always a net loser even when it is considered to have been successful.

If the spending is tax-based, then this requires that the $700 billion in government-dictated economic activity be more effective than the $700 billion in private economic activity it replaces. Given that government spending tends to go to places like Goldman Sachs, ACORN, and various government bureaucracies, there can be no doubt that this is very seldom going to be the case. The government is an economic actor, it’s just a crude and extraordinarily inefficient one.

The essential problem is that very few people spend other people’s money with anything close to the same degree of care and efficiency that they spend their own. This is particularly true of the sort of narcissistic, superficial individuals who are drawn to careers in politics. In the immortal words of PJ O’Rourke, giving money and power to politicians is like giving car keys and whiskey to teenage boys.