Freeman

ARTICLE

Son of "Stimulus"

JULY 10, 2009 by SHELDON RICHMAN

Bad economic policy proposals usually have a superficial logic that fools the economically illiterate into thinking the policies really make sense. For example, anti-price-gouging laws seem to keep goods affordable during emergencies. The government says no one may raise prices “excessively” on generators, batteries, and bottled water. Hurray for wise government policy.

It takes some sophistication to follow Henry Hazlitt’s economics lesson and trace the consequences. Under the new supply and demand conditions, if prices cannot rise beyond a certain arbitrarily set level, supplies will run short, since people have no incentive to conserve and entrepreneurs have no incentive to divert goods from where they are relatively plentiful to the stricken area where they are relatively scarce.

Similarly, most people think the minimum-wage law is a good thing because they dislike that unskilled workers are paid very low wages. What could be more humanitarian than to set a floor beneath which wages cannot fall? If they thought like economists, they would realize that a mandatory minimum wage set above the marginal productivity of unskilled labor creates unemployment or less-desirable jobs for the workers it is intended to help.

But lately an idea┬áhas been floating around that anyone should be able to see through because it has no superficial logic whatsoever. It goes like this: The government hasn’t been able to spend $500 billion fast enough to stimulate the economy, so the only thing to do is . . . give the government even more money.

Huh? How does that make sense?

The Obama administration, for now, seems to grasp the weakness of this reasoning, but the same cannot be said for some members of Congress. There is talk of a second “stimulus” package. We shouldn’t discount the possibility that the congressional backers of a new bill know it’s a ridiculous idea but that they stand to benefit from passing it anyway. That’s how incentives work in the political system.

The first “stimulus” package under Obama was no such thing. As has been noted many times, any money the government spends must be acquired from somewhere in the economy first through borrowing or taxation. While moving money around may stimulate a given activity, it comes at the price of the other activities to which that money would have been directed. And since bureaucrats, not entrepreneurs, direct the “stimulus” projects, this redirection of scarce capital is detrimental to consumer welfare. If the projects served consumers and thus were profitable, they would have been undertaken privately and more efficiently than bureaucracies could have accomplished them.

The money in the earlier bill was supposed to be used for what we were assured were “shovel-ready projects.” But the truth seems to be that precious few were shovel-ready. They won’t get started for a year or more.

Edward Lazear writes in the Wall Street Journal, “By June 26, about $56 billion [out of about $500 billion] was spent on the stimulus from the American Recovery and Reinvestment Act of 2009, passed Feb. 17. A large proportion of that actually reflects mere transfers from the federal government to state governments, so the amount that has gotten into the economy is significantly lower.”

What Were They Thinking?

Thus even if the “stimulus” plan had been sound in theory, back-loading the spending to such an extent undermined its stated purpose: immediate job creation. It makes you wonder what the bill’s architects had in mind. Did they actually believe what they were saying? If so, their actions make no sense. When the bill passed in February, the unemployment rate was 8.1 percent, Today it is 9.5 and rising. That doesn’t seem terribly stimulating. Obama might claim he saved some number of jobs, but he wouldn’t be able to prove that.

Administration spokesmen are now asking for patience, but they are the ones who created a public expectation of quick stimulus. They have only themselves to blame for the disappointment showing up in the popularity polls.

Outside advocates of stimulus, such as Paul Krugman, will say the unabated rise in unemployment only proves what they said all along: The spending package was too small. But that is not a satisfying rebuttal. First, as noted, if government agencies can’t disburse a half-trillion quickly enough to jolt the economy, logic compels us to conclude that they can’t disburse a trillion. Should they fly around in helicopters and drop the money? (That wouldn’t work — people would do unpatriotic things like save or pay off debts.)

Second, economic theory refutes the Krugmanian claim. Since government can spend only what it has first taken from someone else (by borrowing or taxation), the spending can’t create jobs on net. So even if the government-created jobs were real jobs — in the sense that they ultimately contributed to consumer well-being according to consumers’ own priorities — they were created at the cost of other productive jobs that would have been created in the absence of government intervention. Resources are scarce; government spending displaces private economic activity. There is no way around that.

If the Stimulus I was a bad idea, Stimulus II is even worse.

ABOUT

SHELDON RICHMAN

Sheldon Richman is the former editor of The Freeman and TheFreemanOnline.org, and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families.

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