Henry Hazlitt revisited

The lack of economic understanding among our ‘best and brightest’ never fails to amaze me.  The latest example is Secretary of Agriculture Tom Vilsack:

I should point out, when you talk about the SNAP program or the foot stamp program, you have to recognize that it’s also an economic stimulus. Every dollar of SNAP benefits generates $1.84 in the economy in terms of economic activity. If people are able to buy a little more in the grocery store, someone has to stock it, package it, shelve it, process it, ship it. All of those are jobs. It’s the most direct stimulus you can get in the economy during these tough times.

… which sounds a lot like these ignorant remarks made by Nancy Pelosi last July:

Let me say that unemployment insurance… is one of the biggest stimuluses (sic) to our economy. Economists will tell you, this money is spent quickly. It injects demand into the economy, and it’s job creating. It creates jobs faster than almost any other initiative you can name.

God help us.

Government benefits, which are essentially money taken from Peter (or from Peter’s progeny in the form of government debt) and given to Paul, are not stimulus.  I repeat, they are not stimulus.  To suggest otherwise is to fail to understand free market economics, specifically the Broken Window Fallacy, made popular by Henry Hazlitt, and which can be explained through the following scenario.

A group of teenage thugs throws a brick through the window of a bakery.  The baker is disgusted because he has lost a day’s worth of bread (which is now full of glass shards) and now he must pay to have his window replaced and his signage repainted in the new window.  So he hires a glazier and a sign painter to do the work.  A crowd of onlookers gathers outside the bakery as the work is being completed.  One man says, “This is terrible.”  But another speaks up, “No it isn’t.  The glazier and the sign painter both gained a day’s work out of this act of vandalism.  Now they have money in their pockets to spend.  So it was really beneficial.” 

Therein lies the fallacy, because the onlooker doesn’t consider 1) the lost production of the baker, who had to throw a day’s worth of bread away; and 2) the fact that the baker had already voluntarily planned to buy a new suit of clothes with his money, but was instead forced to spend the money on the window repair.  The money paid to the glazier and the sign painter never made it into the tailor’s pocket — he was essentially ‘robbed’ by the act of vandalism at the bakery, and the baker’s new suit was never made.  There was no “benefit” from the broken window; instead of having both a window and his money, the baker now only has a window.  And the glazier and sign painter’s gain of business is the tailor’s loss of business. 

“Stimulus” only works when it contributes to real economic growth, and real economic growth only occurs when individuals have surplus wealth, which can be spent voluntarily on items that are not basic necessities.  Although it’s possible to argue that food stamps and other benefits might allow some individuals to buy more food or goods, or perhaps make marginally higher quality purchases than they would be able to afford otherwise, the simple fact is that by and large, unemployment benefits and food stamps are used to pay for basic necessities — food, clothing, rent, utilities, fuel — things that have to be purchased regardless of financial hardship.  No one goes out and buys a new washer and dryer or takes a vacation to Disneyland with their unemployment checks, because government benefits cannot provide surplus income.  The transition from full time employment to government benefits results in a significant loss of income, which restricts spending to only the basic necessities.  Until people start working again and earning surplus income, significant economic growth will not happen, regardless of how many billions of dollars the government spends (or borrows) to pay benefits.

This idea is so simple, and so common-sense … which may explain why it is completely lost on so many intellectuals in government today.

As a parting shot, here is the brilliant Milton Friedman explaining essentially the exact same economics lesson in 1978.  Take-away quote: “Spending isn’t good; what’s good is producing.  What we want to have is more goods and services.”

The big black cloud that hangs over America
Story Update: Tulsa Tower Guy Comes Down