Category Archives: Redistributive fallacies

Stimulus: Bread and Circuses, Part I

The “cuts” in the recent budget deal have renewed mutterings of the “dangers” of decreasing government spending in a down economy. Somehow this “government spending as the path to prosperity” myth will just not die. The idea is that when government spends money it magically reaps greater economic benefits than when private parties spend money. Not only is this wrong, it is completely backwards! We’ve spent trillions in stimulus and it hasn’t “fixed” the down economy. No consideration is given as to why that might be, it is simply assumed that (a) we didn’t spend enough or that (b) it would have been worse absent stimulus. Argument A simply dumps us in an infinite loop from which there is no escape, akin to an old computer program like

10 RUN STIMULUS

20 IF STIMULUS FAILS, GOTO 10

Argument B is a sign of intellectual laziness as it relieves the arguer of a duty to supply any data to support their claim – just speculate on what might have been and call it a day.

Well, I’ll call that bluff. Using logic we can rationally discern a reasonable outcome of a lack of government spending.  Let’s address the “multiplier effect” part of this myth first. In short no such effect exists. This “effect” is simply the relabeling of a normal function in the economy and claiming it is an inherently unique attribute of government spending. It has a more common name – trade.  If I buy something then that enables the person I spent the money with to go buy something, and that person to do the same and so on. This happens everyday – if government rather than individuals spend the money it doesn’t magically transform the process into something else. When government stimulates by purchasing, the theoretically BEST possible outcome is no better than if the government did nothing.

All government spending by definition must come from the citizens. So in other words we are simply moving money from the left pocket to the right pocket of society. Citizen A had $1 and can spend it on X OR now government has taken the $1 of Citizen A and given it to Citizen B to spend it on Y. Citizen A does not have his $1 anymore so does nothing. Citizen B has the $1 and spends it. As Frédéric Bastiat explained, the “seen” benefit is what Citizen B bought; the “unseen” harm is what Citizen A did not buy. All we have done is shift the preference of goods that are being purchased in the economy. No net economic change has occurred.

But this assumes 100% efficient spending. Government has no inherent self-interest to efficiently spend money it distributes ($1000 hammer anyone?). Although the same AMOUNT of money is spent the goods and services received in return will always be fewer than had it been spent by someone with a vested interest in maximizing what they get for their money (i.e. the original owner). This net decrease in goods received per unit of “government” money spent lowers the overall standard of living and productivity of the economy over time.  This obfuscation of the citizenry by government “bread” (i.e. handing out things that appear to be beneficial and good to some) is a vain attempt to do “something”. Next week we’ll continue with the “Circus” part of the stimulus equation.

Equalization?

Equal. This simple word conceptualizes our most basic and noble sentiments: all men are created equal…equal protection under the law, etc. But, it has a sinister sibling that it is often confused with: “equalization”. This concept is the dubious notion that we should forcefully create a state of “equality” among all citizens, at least on an economic level.

But why this notion that equalization is necessary? The usual answer is that it is “bad” when some make “too much” money. However, this response betrays a childish and simplistic view of the economy, one wherein it is likened to a board game (one player wins and all others lose). This view is based on the fallacy that money itself is wealth. But, it is production, not money, that is the basis for wealth. If money were wealth then the government could just print up a billion dollars for each of us and our troubles would be over!

To illustrate the true nature of wealth let us consider two hypothetical peach farmers, let’s call them Hayek and Keynes (google the names to get the joke here). They each start with one peach tree. Each year they produce a crop sufficient to sustain themselves. After a few years of this Farmer Hayek decides to not sell all his peaches, rather he plants a few to grow new trees. [Economics lesson: the act of not consuming is called “saving”, anything saved is called “profit” and accumulated profits are called “capital”. Capital is that which is produced not for consumption but for further production.] Farmer K sells all his peaches each year and lives it up relative to Farmer H (i.e. he consumes all that he produces and does not save anything). After a few years Farmer H’s new trees start to bear fruit. After several years Farmer H has a large orchard that out produces Farmer K’s single tree. Farmer H now has many options: he can purchase any number of goods that Farmer K could never afford, or perhaps he may hire someone to manage his farm thus allowing him to retire early. His deferment of present consumption (unsold peaches) is accumulated and thus becomes capital (new trees), which makes possible greater future production.

After several years Farmer H makes a hundred times what Farmer K does. Is that bad? Should we “equalize” them by taking the “excess” profit from Farmer H and giving it to Farmer K? Is Farmer K worse off than before? No. Farmer H did not take anything from Farmer K, he simply produced more by employing the simple concepts of capitalism.

The economy is not a zero sum game. Farmer K is not worse off because Farmer H produced more. If a CEO or Wallstreet mogul makes millions or billions it doesn’t negatively affect me (or anyone else) in the slightest. They did not forcefully take anything from me (only the government is allowed to do that!) All “equalization” does is punish those that efficiently produce what other people want. So let’s keep our tax policy focused on funding the government, not on correcting ill-conceived notions of equality.