Monday, February 02, 2009

That Myth of the Stimulus

Tibor R. Machan

Don't get me wrong--it is possible, though not very likely, that some of the huge sums the government plans to steer toward the market place will actually help generate creative, produdctive employment and, thereby, revive some measure of economic growth. But it isn't very likely because of politics.

If you look at the details of the stimulus package--some $800 billion borrowed against future taxes no one knows will be forthcoming and from foreign countries that need to be paid back at some point--a great deal of it amounts to pork, funds directed toward projects that put money into the pockets of the voters in the districts of the politicians who are shaping the stimulus and who feel the need to satisfy those who voted and are expected to vote for them.

This is where the theories of the famous early 20th century economist John Maynard Keynes go astray--he believed that when the economy is faltering it requires substantial and maybe even massive government spending to revive it. Which gave the idea of such spending a boost. President Nixon said once, "We are all Keynesians now!"

But Keynes did not specify in detail how the money is to be infused into the economy--mostly he believed that doing it through funding public works will do the trick. But his current followers are changing Keynes' recommendations. They want the government funds to be given specific direction and believe, moreover, that the folks in Washington, D.C., are able and willing to figure out where such funds will do the most good, how the funds will have what economists of this school of thought call the multiplier effect. This is the supposed phenomenon of getting blood out of a turnip--or repeatedly increasing the investment the government makes by its being reinvested over and over again, never mind that those receiving the money doing the investment have no initiative, no entrepreneurial motivation, to create or produce anything, only to spend the funds. I get funds from Uncle Sam and spend it on a car and the dealer then takes that money and buys furniture for himself and then the furniture store owner and workers spend what they have made from this to improve the shop and support their families, and so on and so forth--as if the money remained the same all through the chain and as if this alone served to actually increase, not only circulate, wealth.

Also, the money does not remain the same amount--at each step some of it becomes a sunk cost, a lost amount consumed by those involved in the transactions. Yes, some of the consumption does generate some income for yet others but not all. If one buys food, for instance, the store and the farmer do gain an income but some of that goes to goods and services that cannot be recovered. The bread and butter or apple I eat are gone, although I will use some of it to supply me with the energy needed to go to work tomorrow. And some people may actually use some funds for a creative purposes, to invent some new, labor saving gadget. But by no means all of it because the funds were not theirs and they didn't think up anything creative, like a new investment, to use the money "to stimulate" anyone.

But this isn't really the worst of it--if it were only this, then the benefits might be greater then the costs. But because these projects the government picks aren't usually what you and I and the rest of the consuming public would have picked, the "investment" is not actually productive. It's sham, like the art works that were produced with the funds the government spent on artists, back under the New Deal. Very little of those works were wanted by anyone. Hardly any fetched a price so the artists could then spend it on further creative works.

The most important thing the Keynesians overlook is that despite the propaganda about how the government's support will go to truly productive undertakings, a great deal of those funds support unproductive adventures, those referred to as earmarks the politicians include in the bills that provide the funds. Of course that is what politicians will do since their reelection depends on it and also, frankly, they are pretty much devoted to helping those who voted for them, never mind whether that help will enhance economic growth.

This is one of the findings of public choice theorists, findings that old and new Keynesians ignore. (In a recent very long essay praising Keynes to high heaven in The New Republic not a word addressed public choice theory, even though it is a direct challenge of Keynes' policy recommendations for which the architect of the theory, Professor James Buchanan, received the Nobel Prize in economics.)

Bottom line is that government ought to get out of the business of investing in various ventures and leave that to citizens, with no special support for any kind of project in any area of the economy. Like referees at a game, government isn't there to get into the game! The players are far better at figuring out what to do on their own initiative.

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