Stimulating economic illiteracy
	
By W. James Antle III
web posted October 22, 2001

Politicians and commentators are responding to the increasingly
dismal economic forecasts with the usual call for "fiscal stimulus."
From the beginning of the New Deal to Bill Clinton's ill-fated
pork-laden stimulus package of 1993, this has been a hardy
perennial trotted out in lean times.
	
As measured by gross domestic product, the economy has
barely been growing for much of this year. Subtract government
spending from the equation and we find that the real arena of
wealth creation, the private sector economy, has actually been
contracting. Something does need to be done to restore
prosperity and resume our national economic growth potential.
	
The answer, of course, lies in unshackling the American people
to create wealth and meet one another's needs within the context
of the free market. Government policy can assist this not by
intervening more heavily but by cutting taxes (especially marginal
tax rates, which influence the relative prices of work, savings and
production versus leisure), restraining the government spending
that drives those taxes upward, repealing regulations and keeping
the dollar sound. That would in fact stimulate the economy now
while providing a backdrop for sustained prosperity in the long
term.
	
Predictably, this isn't what is meant by stimulus when most
politicians are doing the talking. Even those who advocate the
right policies often do so for the wrong reasons. Many Bush
administration economic advisers sound as if they have taken
Richard Nixon's dictum that we are all Keynesians now to heart.
They have been touting tax cuts not as a way to enhance
incentives, facilitate wealth-creation and enlarge production, but
rather as a means of getting money back into consumers' hands
for them to spend our way out of the impending recession.
	
Thus, we have the liberal Keynesians on the one hand arguing for
the government to increase spending as a way of getting the
economy moving again. This would include Robert Kuttner and
Timothy Noah, the latter the author of a ridiculous piece in Slate
arguing that the rebuilding necessitated by last month's World
Trade Center attacks would somehow be good for the economy
in aggregate. Then we have the conservative Keynesians arguing
for the government to increase demand by cutting taxes, so that
consumers (and in fairness, also investors) can spend the
economy back into recovery. Examples of this include Treasury
Secretary Paul O'Neill, who the editors of National Review have
rightly called upon to resign, and supposed supply-sider
Lawrence Kudlow, who writes for NR and is an editor of the
financial section of its website. According to William Anderson,
who teaches economics at Frostburg State University in
Maryland and is an adjunct scholar at the Ludwig von Mises
Institute, Kudlow was actually quoted in the New York Post
talking about the "broken windows effect."
	
It is actually the "broken windows fallacy," first elaborated upon
by Frederic Bastiat. Just as it would be absurd to argue that it is
economically beneficial to throw a brick through someone's
window because they will have to pay to have it fixed, it is
ridiculous to maintain that the rebuilding effort in New York is a
net plus for the economy. Yes, some people will be made better
off but the money and opportunity cost being expended on this
rebuilding effort detracts from other possible, more productive
uses of these resources elsewhere. Other projects will die from
lack of funding as resources are diverted to this effort. Anderson
writes about this at length in his essay, "Is Terrorism Good for
the Economy?"
	
The same is true of Keynesian economics generally, which is
really just the broken windows fallacy writ large. The money the
government "injects" into the economy through increased
spending it first takes out of the economy in taxes (or, if it is
deficit spending, through borrowing). Any alleged benefit this
poses must be weighed against the other possible uses of that
money, especially considering private spending is more efficient
than public spending. It costs the public sector up to four times
as much to create a job as the private sector, some studies have
indicated. New projects go uncapitalized, investments are not
made, and high-bracket taxpayers forgo additional taxable
income as marginal rates climb to fund this so-called stimulus.
	
These assumptions rest on the false premise that consumer
spending is the key to economic growth when slumping
consumer spending during a sluggish economy is actually a
derivative problem. The consumer cuts back spending in
anticipation of a decline in income or possible economic
dislocation. Consumer purchases cannot indefinitely be sustained
without the wealth-creation and production that generates the
income necessary for such purchases. When these decline, then
consumer spending is threatened.
	
This is why any so-called stimulus that does not encourage the
means of production and wealth generation is doomed to fail,
encouraging only bad spending patterns by consumers and
investors. They key is the amount of real wealth available to
support consumption, not the amount of credit card purchases
made in a vacuum.
	
Changes in depreciation schedules, slashes in tax rates and more
judicious domestic expenditures compatible with lower taxes
generally can unleash the creative spirits of the free market.
Growing government in order to grow the economy or
worshipping consumption divorced from production will only
stimulate economic illiteracy.

W. James Antle III is a senior writer for Enter Stage Right and
can be reached at wjantle@enterstageright.com.

Enter Stage Right - http://www.enterstageright.com