We Need More Government Spending?

Paul Krugman (http://krugman.blogs.nytimes.com/) tells us that government deficits are not a problem and that more government spending is necessary to create prosperity. He sees more government spending as a cure for every economic evil and Krugman is not alone.
People point to idle factories, unemployed workers and their unsatisfied wants. All we need to do, they say, is to get the government to start priming the pump. A little government spending would provide the would-be workers with the wherewithal to buy the things they desperately need. This would encourage businessmen to put the unemployed to work in the idle factories. But, wait, this makes no sense. Where does the government get the money to spend? The government can pay out only what it borrows or collects in taxes. So when government spends it is directing resources away from areas that people would have chosen to spend their own money on to areas that government bureaucrats have selected.
There are some simple economic facts we should not ignore. No free man works, buys or sells unless he fully believes that such action will make him better off. No free man ever takes a job at any wage unless he believes he is better off working at that wage than he would be if he did not take it. Likewise, no employer ever employs a man at any wage unless the employer feels that he will better his situation by employing that man at that wage. So, in a free economy, employees and employers believe that they have the best available terms. When they feel otherwise, they shift jobs or employees.
Similarly no one purchases a car or anything else unless that car (or other item) makes the person better off than doing something else with the money. Similarly, no car dealer sells a car unless he places a higher value on the money he receives than he does on the car he sells. In a free economy, all voluntary trades are mutually beneficial – all parties to a transaction believe they are made better off by the transaction. Consequently, any interference with freely made transactions must result in a decrease in the satisfaction and happiness of all persons concerned.
When the government raises the money it spends by borrowing or taxing its citizens, it merely transfers spending power from private owners and earners of the money to the political spenders in power. This creates no new wealth. It reduces the amount private citizens can spend while increasing the amount government can spend. With less money in their pockets and bank accounts, private individuals must reduce the amounts they spend or invest. Money spent by governments cannot create any more jobs or produce any more wealth than it can when spent by private persons. In fact, it creates less, because both the tax collectors and tax spenders must be paid a commission and the resources are not being used where the private individuals would have used them. The labors of the government officials add nothing to the wealth of society. The shift of the money from private citizens to political spenders must result in fewer productive jobs.
If the government spends its money by giving out subsidies to one privileged group, the productive facilities of the country are then partially directed toward satisfying the desires of that group instead of the desires of those who originally earned the money. Many workers and investors must shift from producing goods and services for consumers who earn their money, to producing goods and services for those who first receive the dollars distributed during the government's spending spree. Individuals are less well off because they have not been able to enter into mutually beneficial trades. For instance, if the government spending is for war, then some of the nation's investors and workers must go to work producing munitions and military supplies. All the savings and workers so engaged are withdrawn from industries satisfying the private needs and wants of individual consumers. The end result, of course, is a reduction in the satisfaction of the needs and desires of all those who prefer consumer goods over war goods.
Any switch of money from private owners to political spenders can only result in a redirection of the nation's productive forces and temporary gains for those who first receive the government orders or subsidies. In the end, a readjustment of the nation's productive forces will become necessary.
While Krugman and others are arguing for more government spending they are implicitly or explicitly arguing that if there is a reduction in present government spending a depression could be the result. This argument can not hold unless the economy is unable to adjust to changes in demand or supply. If the government reduces both taxes and spending, it will leave more money in private hands. This money then can, and will, employ more people at higher real wages to make more of what people want most. The nation's productive forces would be redirected toward satisfying the wants of productive persons, rather than satisfying those who were the recipients of government expenditures.
In a free market economy, every worker and investor tends to seek those outlets which will produce what consumers want most, as indicated by the wages and prices consumers will pay. So workers and investors now engaged in satisfying political spending would soon find more profitable outlets satisfying the increased spending of private producers. Everyone would soon have more. That is not a depression. That is prosperity.
In cases where the government prints the money, either directly or indirectly, by first printing bonds and then issuing new money with only its own bonds as security, the result is inflation. Inflation is a tax on everyone who owns or is owed a dollar. Its effects are more hidden than those of other taxes.
Another important difference is that inflation transfers economic wealth from one group of people to another group, as well as from private citizens to the government. The inflation tax is a boon to all who owe dollars and a burden on all who are owed dollars. It changes the values of every contract that specifies a future payment in dollars. It reduces the value of the money involved.
Taxes which raise prices or curtail private spending cannot increase prosperity. Increased taxes reduce the voluntary transactions of a free people and thus make them worse off than if they did not pay the higher taxes. A reduction in government spending and taxing will allow individuals to retain more of their income and thus splendid it where they see mutually beneficial trades.
Competition in the service of consumers is the one and only sure way to produce a prosperity. If government is going to try to create prosperity through spending, then it can only make it appear to be achieving this if government spending is constantly increased, with an ever-increasing share of total production going to the nonproductive. If these constantly increased expenditures are not stopped in time, the result will be a runaway inflation like that which took place in Germany in 1923.
The U.S. is currently running a government deficit nearing $2 trillion. How will that deficit be paid? By printing money and issuing more debt. The U.S. in 2008 had a debt to GDP ratio of about 40 percent. In just a few years that ratio will exceed 80 percent. Issuing more debt is simply transferring taxes from the current productive individuals to future productive individuals. The more debt, the higher the taxes that future generations will have to pay. The amount of money created in the past couple of years is staggering. As shown in the following diagram, the monetary base has exploded – it rose about 760% from January 2008 to January 2009.

The money base has not been lent at this stage but when that base money is circulated through lending, inflation has to occur. Only if the base money can be reduced prior to it being circulated will inflation be minimized. But, if the liquidity is reduced won’t it cause another recession?
Government spending can not lead to prosperity.