I have recently read an argument that sounds vaguely plausible until one gives it a little thought. This argument is that the stimulus package can be stimulating, but only if the money is borrowed rather than gathered through taxation. As I said, it sounds semi-plausible until you think about it.

Apparently those making this argument are conceding the conservative rebuttal that every dollar the government spends it must take from the tax payers, and thus for every dollar of stimulus it also must take a dollar out of the economy, resulting in a net balance of zero. (Or perhaps less, if the government's stimulus spending is less effective than private spending.) To get around this valid argument (without some absurd recourse to Keynesian "multipliers" and arguments that government spending has a higher multiplier than private spending), the proponents of stimulus argue that the money must be borrowed, so that it does not represent a reduction of private spending.

Except that this too suffers from Keynesian nonsense. Specifically the idea that borrowing can somehow create money out of nothing.

The problem with this argument is that every dollar the government borrows comes from the pool of savings. As Keynes sometimes acknowledges (and sometimes denies -- because his theory is internally inconsistent), savings always equals investment, or, to be precise, savings, except for the few rare individuals who hoard money in their mattress, always equals investment. However, ignoring hoarders, who are a very, very small minority, those who save either invest directly or put their money in banks which then loan out the money. In either case, that pool of savings is also the pool of investment. And that is the pool from which the government borrows.

And that makes clear the problem with this theory. Yes, the government is not taking money away form consumption (except in as much as its borrowing depletes money that would have become consumer credit), but it does take money away from investment. Thus, for every dollar the government borrows there is one dollar less for private investment. In other words, borrowing depletes the private sector as much as taxing does. Meaning that once again, any stimulus is offset by a lack of private spending, resulting in a net improvement of zero, or perhaps a negative number, as the government is usually less efficient than the private sector.

Which brings us to the one way the government can spend without taking explicitly from the private sector, the method Keynes implicitly endorsed, inflation. If the government "borrows" by printing money, it can spend without taking from the private sector. Of course, as the money supply increases, everyone's money is worth less, so the government is still stealing form the private sector, just less obviously. And, during the early stages of inflation, the excess of money and the distortions of the market can make it appear the economy is "stimulated", but in reality it is not. What is happening is that the economic distortions have not yet become obvious. So firms are paying out excessive dividends, essentially giving away their capital. And exporters are making huge profits on the books, while in real dollar terms they are actually selling at a loss. In these ways and countless others, the inflationary situation makes the economy appear healthy, but in reality is is something like the "glow" of a fever, the appearance of good health masking a very real and dangerous illness.

No, in truth there is no way the government can "stimulate" the economy. The best it can do is get out of the way and let the economy fix itself. Reducing taxes, stopping corporate and capital gains taxes, reducing regulation, giving up trying to set interest rates, restoring a sound and stable currency, and stop meddling in the financial industry, those will help more than any stimulus package. The government can only spend what it takes, either explicitly in taxes or borrowing, or covertly through the theft of inflation, and what it takes the government will spend less effectively than the original owners would. The government is a great tool for some purposes, but economic growth is not one of them.

In short, let the government defend us from force, theft and fraud, settle disputes through the civil courts, and defend us from foreign aggression, and let the businessmen, the bankers, the workers, the shop keepers, and everyone else run the economy. You wouldn't go to your doctor to get your car tuned, or your stock broker for spiritual advice, so why do we think the government is a good choice to create wealth?