False Economic Stimulus – True Economic Stimulus

False Stimulus

Such a huge hype on “economic stimulus” these days! What is economic stimulus? The Progressives and Keynesians seem to think that any government spending is stimulus. And that it does not matter if the project is “pork” or “earmark-ish.”

This is wrong.

Consider the following: suppose there was a bakery, and some vandals broke the front window of the bakery shop. The poor baker comes out and sees the damage and laments his misfortune. But the Progressives celebrate this while thinking “hooray, work for the glazier.” And this will “save the glazier’s job.”

Here is where this thinking goes wrong: the baker was just about to go to his tailor and order a new suit. He was going to spend the same amount of money on the suit. But now he cannot, because he has to pay the glazier.

Yes, the money goes into the economy equally in both cases. But in the first case, society is no better off by having a window restored to its previous condition. Nothing new is added to the welfare of society. However, in the second case, there is a new suit that did not formerly exist. Society as a whole has gained one suit.

The well-read will recognize this as a paraphrase from an 1850 essay of Frédéric Bastiat, as elaborated by  Henry Hazlitt, in Economics in One Lesson.

The main difference when the money goes to the glazier instead of to the tailor is that the glazier got the money by compulsion, whereas the tailor got the money by choice. The baker really wanted the suit, and felt he would be better off by having it. He never considered having his window broken so he could spend the money that way for no net gain to himself.

There is a parallel with all government spending. Unless that spending is something that people were going to do anyway, then it is always a much poorer choice. This is by definition. The nice, new “bridge to nowhere” would not get built because rational people would not choose to build it. By definition, they have better uses for their money. The only way it gets built is by the government stepping in.

The point is this — virtually all government spending is an economically less valuable choice than the choice of the individual. The case for small government recognizes this truth, and therefore wants to restrict government to those things rightfully and Constitutionally the province of government: law and order, public safety, and national defense.

Any “boondoggle”, “earmark”, or “pork” expenditure — isn’t it obvious that it only gets done by spending tax money? Tax money that must first be taken from someone? Money that would be better spent by that someone?

Government spending can thus only be false stimulus. It may save some job, but those are jobs that we don’t want as much as other jobs. As an absurd example, suppose their was a piece of a stimulus package to train typewriter repairmen. This would create jobs for the trainers of typewriter repairmen. But do we really want such jobs? Would you want to have the career prospects of a typewriter repair trainer?

True Stimulus

Can there be economic stimulus? In a hypothetical free-market economy, anything that improves productivity, such as discoveries, inventions, technological improvements, and improvements in trade produce a stimulus to economic activity. But in a complex, hybrid economy, including all modern economies, there is another form of true stimulus.

Simply get the government “out of the way.” That is, remove the barriers to discoveries, inventions, technological improvements and improvements to trade that are already in place.

As a small businessman, I am intimately familiar with ceaseless, intense focus on what can be done to get better results. If barriers are removed, I can focus better. When government interference saps my energy, time, focus, and strength, I can do less to contribute productively. And when government taxes me more, I can spend less to provide the aforementioned true stimulus — and my business cannot afford to hire as many people as I would otherwise want.

The best way to truly stimulate the economy, to create jobs, is to be “enterprise-friendly”, not “enterprise-hostile.”

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