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Friday, January 25, 2008

An Unstimulating Idea

It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing — the water in the shallow end doesn't get any deeper.

That's how George Mason University economist Russell Roberts describes the logic — rather, illogic — of the economic stimulus proposals that everyone and his uncle are proposing.

If we needed further demonstration of the folly that is the American political-economic system, there it is. The leaders of the interventionist state and the candidates who aspire to command it will continue to produce this inanity until people see it for the balderdash it is and resoundingly reject it.

The problem is that most people don't see it for what it is. When told economic activity is slowing down, they demand that their leaders and candidates assure them there is a Plan to keep them safe. The politicians are more than happy to oblige. Details don't matter much. As long as the president and the presidential aspirants adopt a somber yet hopeful and determined tone, pepper their speeches with big-sounding numbers and reassuring words, and promise to hand out money, most voters will be satisfied. They won't think about what's being said long enough to realize that none of it makes sense. They just want someone to make them feel safe, and there will be no shortage of such someones.

The illogic of stimulus packages makes the mind boggle. It isn't difficult to see when you free your thinking of the biases so many people bring to economic questions. (As I've pointed out before, Bryan Caplan describes those biases in his book, The Myth of the Rational Voter. To hear his take on the silliness of politicians talking about stimulating the economy, click here.)

For starters, any package of proposals would take a long time to go through a political-legislative process marked by haggling, compromise, and political posturing. It is particularly ludicrous for presidential candidates to make promises about stimulating the economy. A new president won't even take office until a year from now! By the time any package is passed and checks are sent out, conditions will have changed. So-called counter-cyclical measures are notoriously late, which is not to say they would work if they were timely.

Next, the size of the packages — which range from $25 billion to $145 billion — is dwarfed by the size of the economy: $14 trillion. Why would anyone who knows this believe that a puny stimulus would work? One answer is that most people don't know how big the economy is. The politicians who do know this are demagogues who want to gain or hold power.


Incoherent Idea

These two objections would apply even if the idea of an economic stimulus were coherent. But it is not. Besides the swimming-pool analogy quoted at the top of the article, Russell Roberts showed the futility of what's being proposed in another vivid way. Noting that politicians love to talk about injecting money into the economy, like a doctor giving a patient a transfusion, Roberts writes, But where does the economic injection come from? It has to come from inside the system. It's not an outside stimulus like … the transfusion. It means taking money from someone or somewhere inside the system and giving it to someone else.

Again, this is simple stuff if one really thinks about it. But few people do. If the government uses fiscal means to goose the economy, the money has to come from somewhere. There is no free lunch. The president and the top-tier candidates do not propose to cut spending — quite the contrary. So, since the budget is already in deficit, any tax rebates and new government spending will have to come from borrowing. But government debt doesn't create wealth; it only transfers it. The lenders won't be able to spend the money or invest it in private endeavors. And the new debt will have to be repaid with interest through taxation in the future, suppressing economic activity then. Likewise, if taxes are raised to provide the stimulus — well, you can finish the thought.

If the government increases some people's ability to spend by decreasing other people's ability to spend, where's the stimulus? Maybe these measures aren't really intended to stimulate anything but a candidate's popularity with appropriate constituencies. Has anyone told President Bush he's not up for reelection?

Populist candidates want the cash transferred from the wealthy to lower-income people because they will spend rather than save it. But that's not how things have worked before: people used a lot of their mini-windfalls to pay down credit-card balances. Moreover, the kind of spending they do engage in — on groceries and sundries — is not the kind that would revive the housing or automobile industries. Increasing the generosity of unemployment benefits, home heating subsidies, and food stamps is no help to such cyclical industries, Alan Reynolds writes.

While the purpose of production is indeed consumption, it doesn't follow that the government can create economic growth by stimulating consumption (even if it could do it without taking other people's resources). You can't consume what hasn't been produced. Without an increase in real earnings brought about by rising real income from increased productivity, an economic boom on the back of consumption will be an illusion, Christopher Lingle wrote in The Freeman. Expanded production requires savings and investment, but government transfers impede those activities.

Thus giving people money and urging them to spend it won't improve their economic prospects. As usual, what looks like a political favor to low-income people is just a cruel hoax. Their well-being depends on genuine and sustained economic growth, which would maximize job opportunities and lower prices. But that requires a radical freeing of the economy — which politicians are not wont to favor.


Who Runs the Economy?

The most objectionable side of the stimulus frenzy is the assumption that government can and should run the economy. The reports of the death of Keynesianism were apparently exaggerated. Most people still believe the economy is a vehicle and the government the driver, precisely adjusting the gas pedal and brake as needed. But really there is no economy. There are only people pursuing ends and the property they use and exchange in the process. If the government tries to run the economy it has to run us. It is a dangerous mistake to think the would-be driver could know what he is doing. He can't possibly know. The system is too complex, the necessary information — much of which is never articulated — scattered too far and wide. In contrast, the market process solves the problem of how to coordinate the productive activities of countless people in order to satisfy consumers.

Those who are biased against freedom will proclaim that our economic problems show that the free market has failed. What free market? Do they mean the free market which for ages and in myriad ways the government has straitjacketed and skewed on behalf of favored interests?

We are in our present position because government has burdened us with taxes, spending, debt, regulations, subsidies, guarantees (to lenders, for example), trade restrictions, fiat money, and other impositions. Between the endless domestic schemes and war, we are being crushed by the weight of the state. We don't need a stimulus. We need freedom.

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