Central planning and the parasites it creates

A dollar spent by the government perverts the entire economy, says Bill Bonner.

Bill is away until 17 April. In his absence, we bring you some of his most insightful, caustic and witty observations from the last 14 years. This article was first published on 24 February 2008.

Not all economists are charlatans. At Harvard is Robert J Barro, who just computed the net costs of the government's 2009 stimulus program. It was originally expected to cost $787bn and is now estimated to come in with a final price tag of $862bn.

What do you get for that kind of money? Well, Mr Barro calculates that each dollar of public stimulus spending costs the economy $1.50 in foregone private spending. A "bad deal," he says.

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His work involves a purely macro-economic look at the subject. He believes government spending is subject to a "multiplier" which reduces or enlarges its effects. In the first couple of years, he assumes, the net effect is positive since the government is spending money without raising taxes to pay for it.

But then, tax receipts inevitably have to go up to pay the costs of the stimulus. And taxes are subject to their own multiplier. Take out a dollar in taxes and the economy shrinks by more than a dollar! Which makes the whole transaction, not only a waste of time and money, it makes the whole society poorer.

"There's no such thing as a free lunch," even in fiscal stimulus, says Mr. Barro. The bill for the stimulus spending must be paid. Taxes must be increased. And when you've done the math all the way to the end of the transaction, you find that you've lost money.

But Mr Barro has a much more generous spirit than we do. He offers no judgment on the character of the government spending as opposed to the private spending it replaced. Like all modern economists, he assumes that a dollar is a dollar and a dollar spent by government is more or less as good as a dollar spent by the private sector.

But a dollar spent by the government is nothing like a dollar spent by the private sector. A fellow might spend his own dollar unwisely. But at least he gets what he deserves. When the government spends a dollar it does worse than waste the money, it perverts the entire economy and creates zombies and parasites.

Here's an interesting item from The Wall Street Journal. India produces barely half as much rice per hectare as China 3.4 tons per hectare as compared to 6.5 tons in China. Even dirt poor Bangladesh gets a better yield on its rice land with 3.9 tons per acre of output.

What's the matter with India's farmers?

We return to a Daily Reckoning dictum to explain it. Anyone can make a mess of things, but to really cause a catastrophe, you need taxpayer support.

Yes, dear reader, India's agricultural sector gives us yet another example of central planning at work. In the '70s, when India was even more of a socialist country than it is now, the government decided to boost production by giving farmers subsidised fertilisers. This led, as might have been predicted, to the overuse of fertilisers, one of which urea severely damaged the soil.

Subsidies, bailouts, quantitative easing, fiscal stimulus all produce perverse effects. In this case, the effects are so perverse that India can no longer feed itself. It's forced to import a large part of its food. Naturally, food prices are rising up 19% last year.

But the cost of food itself is only part of the story. There's also the cost of the subsidies. In 1976, the fertilizer subsidy program cost $640m. Now the price tag is up to $20bn.

Both the soil and the budget are getting worn out. As crop yields decline, desperate farmers put on more and more cheap fertiliser. And then, as the food output goes down, the government thinks it has to do something' to fix the situation. What can it do? Provide more subsidised fertilisers!

Way to go, feds.

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