“Economics,” Henry Hazlitt wrote in Economics in One Lesson, “is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousandfold by a factor that is insignificant in, say, physics, mathematics, or medicine—the special pleading of selfish interests.”
Hazlitt, who in essence was simply updating Frédéric Bastiat’s “What Is Seen and What Is Not Seen,” defines the bad economist as one who looks only at the immediate consequences of a policy, whereas the good economist looks not only at the immediate consequences, but at the longer-term (and often indirect) consequences of the policy.
Calm Examination and Spending
In normal economic times, interest groups have a strong incentive to align with bad economics to lobby for direct benefits from public policies. In times of economic crisis, this natural tendency to concentrate benefits and disperse costs becomes even more pronounced. Thinking becomes emotional and political, and the logic of economic analysis fails to win the day. As Hazlitt put it: “Emotional economics has given birth to theories that calm examination cannot justify.”
Consider the current discussion about government spending and public debt. This is clearly an economic issue that evokes strong emotion and little careful economic analysis—that is, more heat than light. This is not new. On January 6, 1935, Hazlitt published a New York Times article, “The Road to Recovery: Spending or Saving,” in which he gives a fair hearing to both sides of the debate. To the contemporary reader, the discussion will be eerily familiar. Government spending, then as now, is seen to be a source of immediate and direct benefit. If we don’t spend, people will have less money; if people have less money in their pockets they will not buy; if they don’t buy, then stores will not be able to sell; if they don’t sell, they cannot stay in business; if they don’t stay in business, people will lose their jobs; if they don’t have jobs, they will not have money in their pockets; and so on.
Spenders do not address the indirect consequences of public policies requiring increased government spending. On the other hand, the savers support long-run growth. The savings of some become investment funds for private actors through financial intermediation. The savers also criticize the spending agenda in a twofold manner: Government spending tends to crowd out private investment, and public investments tend to be far less efficient than private investments. Government spending distorts the pattern of investment in an economy, and comes with serious costs for the long run.
The Triumph of Bad Economics
Ignoring the long-run consequences of spending policies is what leads Hazlitt to label such thinking as bad economics. Good economics not only looks at the direct and immediate consequences, but traces out the logic of the indirect and long-run consequences. Good economics is what led Adam Smith to condemn the fiscal irresponsibility of government. "When it becomes necessary for a state to declare itself bankrupt,” Adam Smith wrote in the fifth book of The Wealth of Nations,
in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both least dishonourable to the debtor, and the least hurtful to the creditor. The honour of a state is surely very poorly provided for, when in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious.
Unfortunately, as Smith points out in the next paragraph, all governments, ancient as well as modern, have resorted to juggling tricks rather than face up to their fiscal irresponsibility. The juggling trick that Smith is referencing is the cycle of deficits, debt, and debasement. The classical economists and many modern-day political economists argue that due to the negative consequences of "juggling," we need to establish binding rules that curtail such behavior on the part of governments. Keynes—or more accurately Keynesians—broke with this tradition of constraining public authorities and binding them by rules. They opted instead to embrace the juggling with theory and train generations of economists as social engineers to be master jugglers. But for all their "mastery," we are right here: bankrupt.
If you believe official public accounting, we are $16 trillion in debt. If you look at the work on intergenerational accounting by Laurence Kotlikoff, the fiscal gap is far greater: roughly $211 trillion. Promissory government has resulted in a bill that there is simply no way to pay without crippling our economic future.
What this implies is that we have not fixed the problems that led to the bankruptcy six decades ago; the State has simply been attempting to cover the disgrace with juggling tricks. This is what the economist Albert Hahn referred to as The Economics of Illusion, and the United States and Europe embraced the economics of illusion after World War II. The sort of $211 trillion fiscal gap that Kotlikoff reports is not a figure you arrive at overnight; it takes decades of promissory politics backed only by faith.
A Bold, Public Conversation
How to undo this mess is the task that has fallen on this generation. One method is repudiation. Polite folks will not want to talk about matters, believing as they do that you can simply carry on with the juggling. For most of us, this juggling has lasted a lifetime, after all. But this is simply another example of bad economics. Perhaps repudiation is not the answer, but we need to encourage a bold, public conversation about fiscal responsibility and, I would add, sound money. We need to rethink the damage caused by efforts at master juggling by public authorities, and think seriously about Adam Smith’s claim about a policy choice that is “least dishonourable to the debtor, and the least hurtful to the creditor.”