Economic Stimulus and Other Outdated Quackery

Posted: Jan 28, 2009 5:47 PM
Economic Stimulus and Other Outdated Quackery

As President Barack Obama and Congress wrestle over the ironically named economic stimulus plan, the ever-ready-to-serve media are churning out feel-good articles about the likely recipients of all that federal dough and how it would really help them. It's such a well-practiced act of reporting, it took a journalist with a thorough understanding of economics to show what was wrong with it.

That journalist was Henry Hazlitt (1894-1993), author of among other things Economics in One Lesson, a brilliant exposition on economic wisdom that is sorely needed in the District of Columbia and statehouses everywhere. (It's also available in pdf form from the inestimable Foundation for Economic Education).

Hazlitt's insight is as follows: "The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." It's very simple, but it's devastating. It means considering the costs as well as the benefits of any proposal, not just for the group concerned but for everyone, and not just in the short term, but in the long term as well.

That requires an intuition that when politicians and their media me-toos promote a policy solely on the benefits to its benefactors, they aren't telling the whole story. They might not even be telling half the story. If they're not telling the public who will also be harmed by the policy, then they are putting their finger on the scales of public opinion, trying to tilt it their way.

Politicians and media cannot be relied upon to present the full picture of costs and benefits, of course. A responsible citizenry needs to develop this Hazlittian intuition. The great economist Milton Friedman was fond of saying "There's no such thing as a free lunch" (which was also the title of his book in 1975 published by Open Court). However you wish to phrase it, when politicians tout a new policy by how much good it's going to do for the ones it's going to help, the public should have enough sense to ask how much it's going to cost and who's going to pay for it. 

Start with Obama's stimulus package. Resorting to overturned Keynesian nostrums in the middle of a recession is as backwards as physicians today treating a deadly infection by bloodletting. Think about it: if more government spending truly stimulated the economy, then why is the economy in such a shambles after eight years of the Bush administration and Congress growing federal spending from $1.86 trillion in 2001 to $2.98 trillion in 2008?

Federal spending adjusted for inflation has increased by 48 percent since 2001 (60 percent in nominal dollars). A panicked rush to "save the economy" with a massive increase in federal spending now would be like trying to cure dysentery with Ex-Lax.

In the analogy, the laxative manufacturer would benefit. But don't tell the patient his physic is good for a pharmaceutical company and leave it at that. That's a load of symptom.