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Nov 23, 2008

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?

1 comment :

tapsearcher said...

Ray Tapajna, Advocate, Artist and Editor at Tapart News and Art that Talks has covered the failures of free trade and globalization since 1992. His main site is at http://tapsearch.com/tapartnews
He explores the lost worlds in the globalist free trader Flat World of Thomas Friedman, the Clintons, the Bush family and Alan Greenspan at http://tapsearch.com/flatworld
He reviews Alan Greenspan's book The Age of Turbulence in a series of pages. Start with http://www.bizarrepolitics.com/greenspan-dancing-in-the-dark
Prior to the money crisis, Ben Bernanke, Fed Res. current chairman, actually said it all when he said the best thing to do with your stimulus money is to "buy domestically produced" goods. He uttered free trade heresy in the process but in his statement he sums up the core of our money problems. Economies based on making money on money instead of making things, eventually fall apart. Printing paper and calling it money requires manipulations and money products that add artificial values. The only real tangible value we have left is the value of labor and workers and this has been radically deflated by free trade and globalization. The bubble has burst. See http://www.bizarrepolitics.com/ben-says-buy-usa and note all the other Bizarre Politics posts and pages. See also http://tapsearch-global.blogspot.com and http://www.therationale.com searching philosophy and religion in the global economic arena with the common good being chopped up into pieces just like the U.S. economy has been chopped up and shipped around the world. In essence, we have lost World War 2 , fifty years after the war.

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