Ron Paul and Austrian Economists Are Wrong: More Spending Will Save the Economy

Austrians economists would have you believe that demand for goods and services is infinite. That if we merely encourage the “creators” of wealth then they will hire more people and “create” more jobs and more wealth. Nothing could be further from the truth. Here’s a little story to tell why.

Let’s suppose that I am one of the right’s “job creators.” I have a factory that produces widgets. Widgets are necessary in everyday life, but they have a limited lifespan. Ideally, they would be replaced every two months, but in a pinch they can last up to a year. During the Clinton Administration, my factory was fully utilized and I was producing 250,000 widgets a month and selling all of them. There were three other widget factories in the country as well, but mine was the biggest and the most productive. During the Shrub’s first term, I noticed a slight drop off in my sales and my warehouse had a small surplus of widgets. Not enough to be a problem, in fact I saw it as a good thing because now my customers were not unhappy about my missing the occasional delivery date. Oh, and I was still making good money.

When the Shrub was elected for a second term, I noticed a problem immediately. My warehouse was filling up. I laid off my third shift. Two of my competitors closed their doors and the third one outsourced to China. My widgets still outsold those from China because they work better and last longer, and I’ve cut my prices to match the imports. For a while things looked up and my warehouse started to empty out, but it didn’t last. When my inventory started to increase again I laid off my second shift. Then came September of 2008 and the demand for my widgets dropped through the floor. The Chinese widgets were primarily selling in Europe but they cut their production so much that they were no longer a factor. I cut my remaining staff by half and was extremely happy I owned my facilities outright. Because of that, I’m still making money.

Now Romney wants to lower my taxes and give me more money: great! It won’t cause me to build more widgets. My warehouse still has a three-month buffer and that is where I’m keeping it with a ¾ staffed single shift. If I hire more people and build more widgets, I won’t be able to sell them and they’ll just gather dust in my warehouse. That is the fallacy of the Republican economic plan.

In order for me to build more widgets, I need to be able to sell them. Everyone needs widgets and right now I’m the only supplier. Marketing isn’t a problem, demand is. People without money can’t buy my widgets. If the choice is between a gallon of milk or a widget, the widget looses. Giving me more money through tax breaks isn’t going to convince me to hire more people because I have all the widgets I need. I’m making money now, but even with a tax cut, if I hire more people to build more widgets that I can’t sell, I won’t be making money anymore. Now, I may not be a genius on par with Einstein, but I’m smart enough to know that if I’m making money then that’s better than not making money. Until my warehouse starts to empty, I’m not hiring, no matter how much money I have. That would be an act of outright stupidity.

So how do I get more customers? Get more jobs for more people, period, and end of story. Everyone in the private sector is in the same position. We have to make money and hiring more people than we require will make us lose money. The only entity that can hire people without being worried about profit is the government. That government is also in a position to hire lots of people. Our infrastructure, roads, bridges, water supplies and sewer processing among other things, are in serious need of repair. Hiring contractors who will in turn hire workers to repair it or rebuild it is the right thing to do right now. Those people hired for that purpose will buy my widgets and I’ll hire more people. Many other businesses will also hire more people to keep up with increased demand. All of those new jobs will themselves increase demand for everything, and the temporary nature of the infrastructure jobs will be overcome by the ever-increasing demand of all the jobs that the infrastructure work spun off.

Right now, without this infrastructure rebuilding, the economy is growing. It’s growing slowly, but it’s growing. With a little support from governmental spending it will grow much faster, and it can be sustained without governmental spending after that. Once the economy is back on track, the increases in tax revenue will more than pay for the money spent today. Instead of increasing poverty, we will be strengthening and enriching the middle class. That will vastly increase tax revenues and we will have a chance to put our deficits back under control.

The power of every economy is in the 98%, not the 2% at the top. No matter how wealthy the top 2% is, they can’t spend enough money to keep an economy strong. Only the 98%, because they all have needs and there are so many of them, can spend that kind of money. So let the infrastructure get rebuilt, and protect our markets from imports, then we can start to worry about the rest of the world -- when we’re strong enough to do something about it.