Via the WSJ Real Time Economics Blog:
European Central Bank board member Mario Draghi Friday called on governments to bolster demand by boosting spending or cutting taxes, the first such exhortation from an ECB official during the current crisis. It’s far more typical to hear ECB officials, including President Jean-Claude Trichet, admonishing governments to adhere to euro zone rules stipulating that governments keep deficits below 3% of GDP. That rule is one of the currency bloc’s founding principles, meant to ensure profligate government spending doesn’t push up prices in a currency zone with 15 different national budgets and a single monetary policy.
So here’s my question for the Keynesians at the ECB; if government spending is increased, where will the money come from? If they raise taxes to pay for it, they will be taking it away from someone who would either spend or save it. If they borrow it, they will be merely diverting it from the private sector to the public sector. If they print it, it just results in inflation. And if printing it were such a good idea why is counterfeiting illegal? So how exactly will government spending result in recovery? The answer is that it won’t.
Government spending cannot be the answer because government does not generate wealth. Government can only take wealth from one group and give it to another. Does anyone believe that government shuffling of the available capital will be efficient? How many bureaucratic hands will it pass through before it reaches anything that resembles a productive investment?