A Short Argument Against Stimulus

Economist Henry Hazlitt debunks stimulus in three paragraphs at Economics in One Lesson: The Broken Window (1978). Here is the first part:

[edited] A hoodlum heaves a brick through the window of a baker’s shop. A crowd gathers to stare with quiet satisfaction at the hole in the window. After a while, several will notice a bright side. Broken windows support the glass business. This will give $250 in business to a glazier.

Then, the benefit is endless. The glazier will spend $250 more with other merchants, and these in turn will spend $250 with other merchants, and so on infinitely. The smashed window will provide money and employment in ever-widening circles. The logical conclusion from all this would be that the hoodlum made everyone better off.

Hazlitt criticizes this reasoning using just two more paragraphs at the link.

This incorrect reasoning is the idea behind "stimulus", that spending causes money to flow around making everyone better off. Stimulus is used to justify government spending, even if the activities are inefficient or useless.

Stimulus is supposed to justify taking more tax from the lazy investments of the rich, to give money to the non-rich, who will spend it immediately to improve the economy. But, if it were true that government spending created waves of prosperity, we would all be on lounge chairs in Aruba by now.

Stimulus is the fundamental myth of our time. It wrongly tells us that we don't have to be careful about what we buy or in what we invest, because we will somehow create jobs and prosperity if only we all go shopping, and force rich taxpayers to spend through the government.

Stimulus is a cruel myth, because reality is just the opposite. Higher taxes are taken from people with knowledge and ability who are investing in profitable businesses that create jobs. Instead, these resources are directed to uses that produce less. We can have a society of manufacturing and service businesses, making goods that people want, or we can have more bureaucracy, producing paperwork in filing cabinets.

See also Econ 201: The Myth of the Economic Multiplier for a more detailed discussion of stimulus and the related myth of the Economic Multiplier. It is not true that each $1 of spending flows around to produce $2-$4 of benefits. Spending $1 transfers just $1 of goods from one person to another. That's it. What did you expect?