You Cannot Be Serious!

The debate over stimulus has no progressed to the point at which certain individuals are now claiming that wasteful government spending is stimulus. Case in point, Jonathan Chait:

Normal spending is judged on those terms–whether the goods or services justify their cost. The point of stimulus spending, by contrast, is simply to spend money–on something useful if possible, wasteful if necessary.

I similarly heard an economist — who shall remain nameless — on one of the financial news networks arguing that we could literally boost the economy by paying people to dig holes and fill them back in. This is utter nonsense!

Frederic Bastiat wrote in Economic Sophisms:

But what constitutes the measure of our well-being, that is, of our wealth? Is it the result of the effort? Or is it the effort itself? There is always a ratio between the effort applied and the result obtained. Does progress consist in the relative increase in the first or in the second term of this ratio?

[...]

According to the first thesis, wealth is the result of labor. It increases proportionately to the increase to the ratio of result to effort. Absolute perfection, whose archetype is God, consists in the widest possible distance between the two terms, that is, a situation in which no effort at all yields infinite results.

The second contends that effort itself constitutes and measures wealth.

This is indeed at the core of the debate. Those who argue that wasteful spending will jump-start the economy are either disingenuous or simply do not understand how wealth is created. Wealth is not created by turning on the printing presses and handing individuals checks for a worthless day’s work. On the contrary, that is how wealth is destroyed!

Jonathan Chait further succumbs to another fallacy:

World War II was an effective stimulus that, economically speaking, consisted of 100 percent waste. If war hadn’t broken out, we could have enjoyed the same economic benefit by building all those tanks and planes and dumping them into the ocean.

Those who repeatedly make the claims that the New Deal or World War II got us out of the Great Depression are arguing against solid empirical evidence (from Barrack Obama’s CEA Chair Christina Romer no less). Romer’s influential paper concludes:

Monetary developments were a crucial source of the recovery of the U.S. economy from the Great Depression. Fiscal policy, in contrast, contributed almost nothing to the recovery before 1942.

[...]

That monetary developments were very important, whereas fiscal policy was of little consequence even as late as 1942, suggests an interesting twist on the usual view that World War II caused, or at least accelerated, the recovery from the Great Depression. Since the economy was essentially back to its trend level before the fiscal stimulus started in earnest, it would be difficult to argue that the changes in government spending caused by the war were a major factor in the recovery.

Further, any effects on growth from World War II largely had to do with the effects of financing, not with spending:

. . . Bloomfield’s and Friedman and Schwartz’s analyses suggested that the U.S. money supply rose dramatically after war was declared in Europe because capital flight from countries involved in the conflict swelled the U.S. gold inflow. In this way, the war may have aided the recovery after 1938 by causing the U.S. money supply to grow rapidly. Thus, World War II may indeed have helped to end the Great Depression in the United States, but its expansionary benefits worked initially through monetary developments rather than through fiscal policy. [Emphasis added.]

Critics, such as Krugman, will perhaps note that the spending during the 1930s was not truly stimulus in the sense that it was not financed with deficit spending. However, as I have previously detailed, given that the empirical evidence suggests that Ricardian equivalence is a good approximation of the actual behavior of individuals, it is likely that the effect of financing would be equivalent to the effect of a tax increase.

Ultimately, regardless of one’s stand on the need for stimulus, it is necessarily true that any form of government stimulus must be justified by its intrinsic value. The practice of wasteful spending, on the other hand, destroys wealth.

5 responses to “You Cannot Be Serious!

  1. Pingback: Interesting Economics « Thinking Things Through

  2. “any form of government stimulus must be justified by its intrinsic value. The practice of wasteful spending, on the other hand, destroys wealth.”

    I’m surprised that you dismiss the spending for WWII so easily. The production of war materials was of immeasurable “intrinsic” value to Americans at the time. Thus, it created vast amounts of wealth which eventually served to bring the economy out of the Depression.

    And, no, spending similar amounts now would not have the same effect — no more than would spending a few billion dollars on buggy whips.

    No one sees the need for either. It would be a waste, rather like Reid’s high speed rail from Disneyland to Las Vegas.

  3. No empirical evidence is offered. Try reading even Romer’s paper first.

  4. Josh,

    Thank you for your kind e-mail in response to my abrupt and inaccurate comment. My ire had nothing to do with you, so I offer my sincere apologies, and will endeavor to aim a barb at the correct targets, with a link or two. You write a great set of posts.

  5. What I find amazing is that Chait believes his is the intellectual argument for Keynesianism. I blogged on this too which you can see by clicking through above. My conclusion:
    Chait is an insufferable prig.

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