The Fatal Conceit

John Stossel

3/11/2009 12:01:00 AM - John Stossel

We've been rolled again.

Sure, the economy is in bad shape -- though the late '70s and early '80s were worse in many ways, but is it true that every economist agrees that massive "stimulus" is the solution?

"A failure to act, and act now, will turn a crisis into a catastrophe," President Obama said.

If someone expresses skepticism, Obama and other political leaders suggest that economists are unanimous in believing that government spending is the only answer.

"We have a consensus that we need a big stimulus package that will jolt the economy back into shape," Obama said.

House Majority Leader Steny Hoyer agreed: "Every economist from right to left, Republican, Democrat, advises that it has to be a very substantial package."

It's a lie. There was no consensus. (Anyway, a consensus doesn't mean something is true.) Finding an economist who opposed government spending as a way to fix the economy was easy. More than 350 signed a opposing the bill. You can hear some of them on "20/20" this Friday at 10 p.m.

"How is it the government is going to be able to spend a dollar in such a way that it generates a dollar or more in value?" asked George Mason University economist Peter Leeson. "A more likely possibility is that a dollar that government takes out of the private sector is a dollar the private sector doesn't have to spend."

Leeson is referring to the "broken-window" fallacy, which comes from Frederic Bastiat's story about a boy who throws a rock through a shop window. Since the shopkeeper has to buy a new window, some believe the mischief will actually stimulate the local economy. The fallacy lies in overlooking that the shopkeeper would have spent the money some other way if he didn't have to replace the window.

Every penny the government spends will first have to be borrowed from someone in the economy. So where's the stimulus?

It's also quite a conceit to believe that a few men in power are smart enough to know precisely how to spend trillions of your dollars.

"They're exploiting a minor correction in the economy. ... Markets go through corrections all the time," Lydia Ortega of San Jose State University told me.

I pointed out that people say this correction is worse -- maybe like the Depression.

"But markets need to go through this correction," she said. "What's happening now, what's making it worse, is that people don't know what's going to happen. There's so much uncertainty generated by the government spending."

The more the government does, the more private investors wait.

"Part of the reason that people aren't spending is they don't know what these characters in Washington are going to do," says Howard Baetjer of Towson University.

"Japan tried six spending packages in the early 1990s. The result? A decade of lost growth," points out Ben Powell of Suffolk University. "It's the government's own policies that contributed to the bubble. The government's not the answer to it."

I wanted to ask the bailout's big boosters about that. Two agreed to talk, Maxine Waters of the House Finance Committee and Majority Leader Hoyer.

Hoyer conceded that he "overstated the case" when he said every economist endorsed government action.

Wasn't the bubble caused by too much debt? I asked.

"No doubt about it."

So the answer is more debt?

"Most economists believe that's the case."

This stimulus spending is this going to work?

"I hope so."

Might it cause hyperinflation?

"We hope it doesn't. "

Well, that's comforting.

"Government can't sit and just twiddle its fingers," Rep. Waters told me. "We have got to interject money into these banks and these systems that help this economy work."

How are you going to pay for it?

"We have borrowed money before. We continue to borrow money, but we pay it back."

She left a few things out. Debt means interest payments and higher taxes in the future. It also means inflation when the Fed prints money to reduce the real value of the debt.

But the politicians are confident that they can wisely spend trillions of your dollars. The arrogance of the political class is stunning.