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Wednesday, February 18, 2009

The Fallacy of the Short Run

In his classic, Economics in One Lesson, Henry Hazlitt wrote that every generation must learn to engage in sound economic thinking for itself.  This is because the fallacy of the short run in economic matters constantly manifests itself in new forms, as demonstrated in Lawrence Reed’s “7 Fallacies of Economics.”

Reed wrote:

In a sense, this fallacy is a summary of the previous five.

Some actions seem beneficial in the short run but produce disaster in the long run: drinking excessively, driving fast, spending blindly, and printing money, to name a few. To quote the venerable Henry Hazlitt again, “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences.”

Politicians seeking to win the next election frequently support policies which generate short- run benefits at the expense of future costs. It is a shame that they sometimes carry the endorsement of economists who should know better.

The good economist does not suffer from tunnel vision or shortsightedness. The time span he considers is long and elastic, not short and fixed.

Today the prime example of this fallacy is the so-called stimulus bill, which President Barack Obama and his supporters are touting as a way to save our declining economy.  According to the President and others, a short-term burst of spending will fill the hole of lost consumption and enable the economy to repair itself.  New York Times columnist Bob Herbert, an Obama supporter,  declares as he excoriates those who oppose this latest orgy of borrowing and spending:

[The opponents] act as if they don’t understand that in this radical economic downturn the demand for goods and services has fallen off a cliff, and that government spending is needed — and needed quickly — to replace a large portion of that lost demand.

The goal is twofold: to alleviate some of the enormous suffering (something that is easily understood if you have a heart), and to revive the battered economy (equally easy to understand by anyone with a brain).

Herbert approvingly quotes Obama to rebut those who say the “stimulus” bill was really just a spending bill. “What do you think a stimulus is? [Spending] is the whole point.”

Herbert has based his defense of the “stimulus” precisely on short-run thinking.  People are hurting now.  They need help now.  We must spend and spend now. Somehow, the future will take care of itself if only we act now.

Yet not a thought is given to the consequences of taking on almost a trillion dollars more in debt overnight—the inflation, the economic distortion, the future taxes, and the hardship they will bring. The very resources that are needed for economic recovery will be consumed by politicians and bureaucrats.

Pointing out the fallacy of the short run is not nitpicking.  Those who fall to its lure really are paving the way for a bigger crisis later.  The “battered economy,” as Herbert calls it, cannot be repaired by more government borrowing, spending, and printing money.  Whatever short-term fix that might occur will give way to even longer-term tragedy.

Good economists recognize this important fact.  Unfortunately, bad economists seem to be controlling the debate. We will be poorer for it.

Next Week: The fallacy of economics by coercion

  • Dr. William Anderson is Professor of Economics at Frostburg State University. He holds a Ph.D in Economics from Auburn University. He is a member of the FEE Faculty Network.