More Debt?

News Alert

from The Wall Street Journal

President Barack Obama will roll out a proposed $30 billion small-business lending program Tuesday, the next in a series of administration efforts to jump-start hiring by the nation's small businesses.

Read the whole article here. You will find this link interesting and relevant, too

Do you suppose that BHO or anyone else (including Bernanke and other leading economists) will ever figure out that economies do not succeed due to increased lending financed by tax dollars or federal deficit spending? So far, there is no evidence at all that the Obama administration has even a small clue about this basic point.

When borrowing by businesses for investment in plant and equipment is financed by savings of households (through households' voluntary, self-interested purchase of stocks and bonds), the economy grows, because the savings of households are flowing to productive businesses who use the money to invest in productive capital goods. The expansion of plant and equipment (which typically embodies advancing technologies) improves the productivity of labor. The economy grows; workers get paid more as their productivity rises; we call it economic prosperity.

If the businesses who borrow households' savings are not productive---thereby generating a return for the households who invested in them---households withdraw their savings and look to invest in greener pastures. That's the beauty of self-interested voluntary exchange. The saved dollars end up where they are most productive. That's good for lots of folks---household savers benefit, owners of businesses who borrowed benefit, and consumers who buy the valuable goods and services produced by the businesses benefit; again, we call it economic prosperity.

When borrowing by businesses is financed by the federal government (either by federal tax dollars or by increasing the federal deficit), there is no voluntary exchange of household savings for business investment. Instead, bureaucrats in Washington direct dollar flows to businesses, and they do so with little or no regard for whether the businesses are productive enough or profitable enough to generate a return.

You would think we had seen enough of what results from that sort of project. It's why the Soviet Union failed. It's why so many underdeveloped countries remain underdeveloped (not the only reason, of course). Politicians have no ability to direct the flow of money to productive activities, even if they wanted to. They have insufficient information to do so, even if they were so inclined. As it happens, politicians are not generally so inclined in the first place.

As it happens, politicians tend to direct the flow of tax dollars and increased deficit spending to constituents who get them elected. The benefits of the directed dollar flows are highly concentrated on the few, while the costs to taxpayers are widely dispersed. That's how we get "the bridge to no where." That's how we get $200 hammers purchased by the Department of Defense. That's why you and I aren't in Washington complaining about Congress's earmark pork barrel projects, but the recipients of the funds are there (in the body of their lobbyists) with their hands out.

When businesses borrow to make payroll or to purchase supplies or to finance any other part of their day-to-day operations, it had better be short-term borrowing intended only to bridge a temporary gap between sales receipts and operating expenditures. If it's borrowing to make up for insufficient sales, the end result will be bankruptcy. Sadly enough, lots of small businesses (and large businesses too; e.g., Chrysler and GM) have borrowed to finance day-to-day operations, with little or no probability of sales receipts ultimately financing their operations.

Day-to-day business operations must be financed by sales. Expansion of plant and equipment (and replacement of worn out plant and equipment) must be financed by the savings of households. A basic understanding of the circular flow of income and expenditures in the aggregate economy explains why it cannot be otherwise. It's just an accounting relationship; nothing theoretical about it.

Will expanded credit availability to small businesses help the economy return to growth? Maybe, but why would we think that federal bureaucrats have some special knowledge of which small businesses will be productive enough to repay their borrowing? Why shouldn't we expect commercial banks to channel loans to small businesses that are worth the risk? After all, that's the business of commercial banks. That's what they are supposed to be expert at doing.

If the commercial banking system as we know it doesn't get the job done, then why did we taxpayers need to bail them out with TARP, Son of TARP, and Barf TARP? Hope and change? We can hope for a change, but so far, there isn't much evidence we will get it. Seems pretty much business as usual from this seat.