21 September 2011

The Fallacy of Stimulus Plans

I’d like to revisit and expound upon a thought I had in yesterday’s post on forgiving student loans:

Can we get rid of this whole nonsensical stimulus thinking?  All money circulates.  Ceteris parabis, the money will be spent at some point.

I wanted to explain this more thoroughly yesterday, but I was pressed for time so I couldn’t explain, to the degree necessary, what I meant by this.  Fortunately, Dom Armentano has already done this for me:
Can government spending create jobs? Governments can certainly create jobs in the public sector; they do it all the time and Obama's bill will do more of it. Governments can hire school teachers, social workers, and millions of other bureaucrats to administer its thousands of programs and regulations. Importantly, however, the funds for these jobs must be provided by either taxation or by borrowing from the private sector. Thus as almost all economists recognize, public sector employment comes (in some real sense) at the expense of opportunities for private sector employment.
To see why this is so, assume that $1million dollars is raised by taxation to, say, fund new staffing at the Environmental Protection Agency. No debate; public sector jobs get created. But note that the very same $1million cannot be spent by taxpayers on new washing machines or trips to Las Vegas or newspaper subscriptions. Thus for every job created by government spending there must be a tradeoff of jobs NOT created (or maintained) in the private sector of the economy. In economics, there is no free lunch.
Private sector jobs, on the other hand, are created in an entirely different manner; if they are sustainable, they are self-financing. Private employees are hired with the expectation that their wages will be paid by the additional revenue or value that they generate for the employer. Individuals that work for washing machine retailers or for a travel agency or for a newspaper must generate a stream of benefits for the company that compensates for the wages they are paid (or they will be fired). In short, private firms can hire workers – that is create jobs – if and only if it is profitable for them to do so.

In essence, the unspoken assumption of all arguments for government-provided stimulus is that money can only circulate if it goes through the government, and that money will fail to circulate if it does not go through the government.  Ultimately, the problem is that too many economists ignore Bastiat's warning and focus on that which is seen while ignoring that which is unseen.

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