Stimulus As Seen Through Becker's Chicago Lens

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After writing and publishing a few thoughts on Obama’s stimulus plan, I got around to reading yesterday’s Wall Street Journal. I found that two Chicago economists, Nobel Laureate Gary S. Becker and Kevin M. Murphy, had written an op-ed called "There’s No Stimulus Free Lunch." That piece elicits some reactions from me.

But before getting to that, a personal question came to mind. How was it that I approached this legislation rather differently than they did, my approach being far more Austrian, radical, and anti-state? I had to think back 40 years. My doctorate comes from the University of Rochester’s School of Management. This is a business school, not a department of economics. But the focus of the school was and is economics. Major elements of the faculty were Chicago economists. Yet after a few years there, I was reading Austrian economics. At a garage sale, for less than twenty-five cents each, I bought (among others) von Mises’ Human Action, Hayek’s The Road to Serfdom, Spencer’s Man Versus the State, and Molinari’s The Society of Tomorrow. How did I know enough to recognize these and buy them?

The answer has several parts. The most important one is that the faculty had inquiring minds. They asked questions. They raised questions. They questioned each other’s work. They raised problems with the work of others constantly. Nothing was taken for granted. One always could delve more deeply into anything that was accepted or passed for knowledge. The excellence of this faculty lay, not so much in propounding a particular point of view as such, but in providing an immersion into intellectual challenge. Faculty doors were open to students, another important factor. Students were treated as equals in the sense that they could raise objections and command a hearing as much as a faculty member could.

I had many conversations with Professor Donald F. Gordon. Don was the teacher of Douglass C. North, who won a Nobel Prize. One source reads: "North earned his Ph.D. in economics at the University of California at Berkeley, but by his own admission learned how to reason like an economist from Donald Gordon, one of his colleagues at his first job at the University of Washington." Another source says of Don: "While Saskatchewan is on the mind, here’s to the greatest intellect I’ve ever known, a Saskatchewan man, and a superb economist, the late Donald F. Gordon." Don wrote little. He conversed much. Paul Samuelson felt he had to respond in print to one article in which Don critiqued Samuelson’s Foundations of Economic Analysis.

In one course, Professor Martin J. Bailey had us writing Constitutions so as to overcome problems with our own. His own work, I now learn, resulted in a book that I have not read, Constitution for a Future Country. The extensive book review (by Ed Clarke) of this lauds Bailey’s work most highly.

Imagine a faculty filled with a dozen or more Don Gordons and Martin Baileys. They emphasized methodological individualism and microeconomics. They emphasized qualitative, not quantitative economics. Mathematical economics was not part of the curriculum. Price theory was. Economic reasoning was. Inquiry emphasized theory, thought, ideas, and interpretation above empiricism. They were limited government men. They did not neglect economic history. Sooner or later, the inquiry fell on Wicksell, Bhm-Bawerk, Knight, Hayek, and others. One easily discovered the Austrians.

What common ground is there between Becker and Murphy and me (an unelected stand-in for Austrian economists)? "[Government] Spending is not free," Becker and Murphy tell us, "ultimately it has to be financed by higher taxes." This statement is necessarily true, since gifts to government are a negligible portion of its revenue. I agree.

Is the lunch that the government buys with the taxes worth the price it pays? Becker and Murphy tell us that "higher income and business taxes generally discourage effort and investments and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt." Those losses are to be toted up against the stimulus package. I agree.

I go much further, however. It is not only that effort and investment are discouraged, it is also that the government spending misdirects effort and investment. Capital goes into mal-investments. Workers waste their time and effort getting on-the-job training in skills that are not in demand. Thus, human capital also goes into mal-investment. These mal-investments burden the economy until they are liquidated or re-directed, and that produces recession, with another set of costs. While all that is happening, consumer wants go unmet when government spending pours into projects that are ill-advised. These are further costs.

These costs are not all. A stimulus bill, of this size especially, reinforces a negative dynamic that places its own burdens on productive effort. Any government that acts as an ex post insurer against economic problems (even of its own creating) induces people to expect bailouts in the future. They rearrange their lives accordingly, becoming more dependent on government. They also learn to use the power of government to take from others. These actions cause the social system to deteriorate and the private economy to atrophy. They are part of a dynamic process in which government grows and private product fails to live up to its free market potential. The morality of the entire society also deteriorates.

Becker and Murphy point out two more negatives. One is that many parts of the bill are politically inspired, the result being that "various components of the package are unlikely to pass any reasonably stringent cost-benefit test." I agree but I look at this matter quite differently. First of all, there is no empirical cost-benefit test, stringent or otherwise, that can be done. It can’t be done because there is no way to measure all the costs when the public must pay taxes. There is also no way to measure benefits when some people gain and others lose. There are no objective measures of such values, and there are no markets in government goods that provide such measures.

Second, to measure costs and benefits is to presume that government is a fit entity to do investment projects. It presumes that in some cases the benefits will be found to exceed the costs, so that government coercion is warranted. I disagree. Government coercion is never warranted, not only because force is bad, but also because most people think and agree that force is bad at the personal level. Government coercion undermines an essential aspect of society’s social capital, which is the distinction between right and wrong that most people in the society believe in. Most people do not believe in using force against others personally. When their government does this, society starts to becomes unglued as the distinction between right and wrong is officially erased.

Becker and Murphy’s case-by-case approach also fails to recognize the long-term negative dynamic of government power. Over time, we have found in America that the government can engage in any project it wants to, the Constitution being such as to permit this. Invoking a benefit-cost test merely provides a cloak of respectability thrown over the ugly fact that every conceivable project is up for government grabs.

The second negative that Becker and Murphy mention is that the government will be unable to spend $500 billion wisely in a short period of time. This is surely true and a worthwhile observation. Haste makes waste. I think there is something else of even greater fundamental importance: the government is unable to spend its revenues wisely even given long periods of time. For government, slowness also makes waste.

Becker and Murphy note that government programs tend to survive once they are put in place; very rarely are they cut back. In other words they recognize the ratchet effect pointed out by Robert Higgs. I agree. The only reason why they regard this as a negative is that after the economy returns to full employment, the stimulus of that spending will be smaller than now, when there is less than full employment. In their words: "The multiplier at that time will surely be much closer to zero." This means to them that a dollar of government "product" will simply substitute for a dollar of private product.

I go much further. Government product (spending) is not equivalent to private spending. The two differ fundamentally. Government spending arises from violent intervention into private exchanges, whereas private (non-criminal) exchanges are peaceful. Dollars spent by government are not in any sense economic substitutes for dollars spent privately. The latter lead to improvements in utility of all persons who exchange, while the former leave some persons better off at the expense of others who are worse off. As I have just argued, violent government intervention leaves society generally worse off because the government’s violent intervention breaks down the rule of law that is written in people’s hearts.

Becker and Murphy ask "How much increase in Gross Domestic Product (GDP) can be expected from the stimulus package?" Their guess is that one dollar spent by the government will raise short-term GDP by "well below one" dollar. I agree. They think that the projects chosen in this bill "would mainly have to draw resources away from other uses." I add that this is true of all government projects.

Unlike Becker and Murphy, I do not accept the notion of making GDP a target and a criterion by which to evaluate a stimulus package. We can fancy that it would make a better criterion than the current situation in which Speaker Pelosi expresses the utter corruption of democratic politics on a truly grand scale that outdoes Jim Wright by orders of magnitude. We can fancy that it would be an improvement over the total waste being visited upon us now by Pelosi and company, if they were actually forced to justify their spending on the basis of real benefits. These fancies can never be realized. The government will invariably concoct, manipulate, or ignore whatever statistics are under its control. GDP is simply one tool in its arsenal. If we choose jobs created by a program as a target statistic, the results will be just as dire: waste and more waste. When the idea is to feather the nests of selected constituencies in such fields as energy, health, and education, GDP is just a convenient propaganda tool. It presents a height to be scaled linked to an assurance, soon forgotten, that it will be scaled. As a target, GDP turns us into pack animals hitched to a wagon managed by government with a whip, trying to make the wagon reach the highest possible elevation.

GDP is part of Washington’s smoke, mirrors, speech-making, and hand-waving. It presents the (false) appearance that the economy is a manageable entity that Washington manages for the good of the public. Beneath the hand-waving and hoopla, the tawdry game of money transfer plays on.

Becker and Murphy’s bottom line is that the short-term stimulus of the package will be smaller than what others expect, but that there may be long-term benefits from parts of it relating to energy, health, and education. This conflict seems to stymie them. Not me, for there is no conflict. There are no long-term benefits either. No government money should be or needs to be spent on windmills or whatever passes for renewable energy these days. The government is so smart that it filled the strategic oil reserve with millions upon millions of barrels of high-priced oil that has now crashed in price. The government cannot pick winners in energy and it can’t keep up with changes in energy markets and technology. It is total foolishness to think it can. The stimulus bill contains several health provisions that will remake the face of American medicine by controlling what doctors prescribe and their medical treatments. There are no long-term benefits in that direction, only very high costs, when older patients begin to be denied treatments, even when they are willing to pay for them out of their own pockets. At that point, I expect we will need one or more Samuel Adamses to create Committees of Correspondence. I have read that the stimulus bill commits more funds to education than the sum of the past ten years. Whatever the figure is, it is too big by its total amount. The government cannot produce high-quality education any better than it can maintain levees or bring aid to the inhabitants of New Orleans.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

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