In his classic 1981 article, u201C7 Fallacies of Economics,u201D Lawrence Reed noted that people believe that production exists u201Cfor its own sake.u201D He wrote:
Although production is essential to consumption, let’s not put the proverbial cart before the horse. We produce in order that we may consume, not the other way around.
He then succinctly pointed out:
A bad economist who falls prey to this ancient fallacy is like the fabled pharaoh who thought pyramid-building was healthy in and of itself; or the politician who promotes leaf-raking where there are no leaves to be raked, just to keep people u201Cbusy.u201D
It seems that whenever an industry gets in trouble, some people cry that it must be preserved u201Cat all costs.u201D They would pour millions or billions of dollars in subsidies on the industry to prevent the market’s verdict from being heard. The bad economist will join the chorus and ignore the deleterious impact that would befall the consumer.
The good economist, on the other hand, does not confuse ends with means. He understands that production is important only because consumption is even more so.
Lest one think that Reed was exaggerating, I would recommend reading the editorial pages of the New York Times for a week, as most of its columnists and editorial writers engage in this fallacy on a regular basis. The latest to recommend u201Cproduction for its own sakeu201D as a way to end the current depression is Bob Herbert, who seems to be a walking dictionary of economic fallacies. His latest column, u201CThe Magic Potion,u201D literally treats the government money printing presses as something that can work u201Cmagicu201D in u201Ccreating jobsu201D and restoring the U.S. economy.
There is something perversely humorous when a u201Cjournalistu201D who claims to be a u201Cwatchdog of governmentu201D literally claims that government policies can work something akin to magic. Furthermore, he has plenty of readers who swoon over his every word, and although I doubt that most readers here will be in that category, nonetheless I include his missives, anyway, if for no other reason than to point out just how silly — and destructive — the media pundits have become, not to mention the economic illiteracy that infects the chattering classes.
The first thing I need to point out is that Herbert believes — really believes — that government is the Source of All Wealth. Thus, a man like that is not going to back down or admit that perhaps government spending just might be destroying wealth. Second, like so many journalists, commentators, and u201Ceconomistsu201D (Paul Krugman comes to mind), there is this little issue of causality, determining what causes what. Here is an example of what I mean from Herbert:
Those who think some kind of robust recovery is hiding around the corner, just waiting to spring a pleasant surprise on us, are deluded. Too many families and individuals are tapped out. They’re struggling from week to week and month to month just to meet the necessities of housing, food and energy costs. Those crazed, debt-driven buying sprees that held the economy aloft for so long are over.
In other words, consumers cannot spend us back into prosperity. Well, guess what? Consumers don’t u201Cspendu201D any economy into prosperity. Consumption is the end of production; consumers can spend because they have produced, not the other way around.
To a person, the people who appear regularly on the NYT editorial page, not to mention a jillion other publications and websites, really believe that all that is needed for an economy to grow is for consumers to have lots of money in their hands and then they spend, spend, spend us into prosperity. Herbert is right in that consumers are tapped out, but the question is why.
According to Herbert, it is because jobs are becoming scarce. He writes:
You can’t get back to a robust economy without putting Americans back to work. The economy needs to be rebuilt on a solid foundation of good jobs at good pay, and many of those jobs will have to come from thriving new industries. This is a long-term project that demands big-time government involvement. It will require the kind of commitment — over an even longer period of time — that President Obama and the Democrats in Congress gave to their health care initiative.
Franklin Roosevelt had it right in his first Inaugural Address when he declared, u201COur greatest primary task is to put people to work.u201D He underscored the urgency of the task when he said it should be treated u201Cas we would treat the emergency of a war.u201D
At this point, a reader might ask, u201CWho can argue with that? If people are employed in high-paying jobs, they are going to be able to consume.u201D That is true, but here is the problem: the issue is not the high-paying job; the issue is what is being produced and how do consumers value what is being produced.
Recently, Herbert wrote about u201Crights of consumers,u201D yet, he now pens an anti-consumer column. Read the following to understand what I mean:
The administration and Congressional leaders have been touting some recent legislation as u201Cjobs bills,u201D but they are small-bore initiatives that will accomplish little. What is needed are bold new initiatives on several fronts. The federal government needs to do much more to help state and local governments that are in desperate fiscal straits because of falling tax revenues and are responding by laying off workers and cutting essential services.
A long-term program to rebuild the nation’s infrastructure (which was only made worse by the harsh winter) would create jobs and establish a sound industrial platform for 21st-century industries.
The transformation to a greener economy needs to be accelerated, and most of the manufacturing associated with that newer, greener economy should take place in the United States. And some new variation of the Works Progress Administration and the Civilian Conservation Corps should be developed to put economically distressed young people to work. What is happening to young, out-of-work and poorly educated American kids — not just in the big cities, but increasingly in suburban and rural areas, as well — is tragic.
In other words, he pushes for government to ram u201Cgreen energyu201D down the throats of consumers who clearly through their purchases have said they don’t want it. Why is corn-based ethanol an expensive and destructive boondoggle? It is because consumers have spoken already and they have said that they are not willing to pay the full price for corn-based alcohol to be poured into their cars (and wreck their engines).
Herbert makes it absolutely clear that he considers government to be the source not only of wealth, but also the entity that should determine the direction of production. For all his going on about consumers, he actually is anti-consumer. Furthermore, we should not forget that the housing bubble occurred precisely because government agents purposely steered the economy toward building, buying and selling houses, and that artificial u201Cstimulusu201D ultimately proved to be unsustainable. Consumers purchased houses when they would have been wiser putting their money elsewhere because the government greased the skids (and a few palms) by pushing resources into that market that would not have gone in that direction had there been no government intervention.
Believe me, pushing the housing market was a u201Cbold new initiativeu201D and we see where that went. Unfortunately, Herbert seems to be impervious to logic and ends the column with even more head-scratching words:
As for the budget deficits, they will never be brought under control if Americans are not put back to work. Unemployment drives deficits by depriving the government of tax revenues and dramatically increasing the costs of safety-net programs and other public services. Putting Americans to work will ultimately make it much easier to begin bringing the deficits down.
The closest thing to a magic potion for individuals, families and the American economy is a job. F.D.R. understood that. The longer it takes for the rest of us to catch on, the deeper the long-term damage to the society will be.
What is he really saying? Bob Herbert is declaring that in order to bring budget deficits u201Cunder control,u201D government must run larger deficits. Yet, while apparently that makes perfect sense to Herbert, it does not compute with me. Now, if he is claiming that extra spending now will u201Cprimeu201D the economy to where it will produce u201Con its ownu201D in the future, I can understand the reasoning, even if it is wrong.
Keep in mind that few people at the NYT have attacked private enterprise more than Herbert, and all of the government initiatives he has been championing are those initiatives that need subsidies to survive. Is he trying to say that massive subsidies to u201Cgreen jobsu201D will result in those lines of production suddenly turning profitable in the future? What portion of the economy will be profitable so the government can have positive numbers with taxes and spending? He doesn’t say.
Instead, he claims that FDR knew something apparently the rest of us don’t know; people need to be able to pay their bills, and in our society, a u201Cjobu201D provides income for them to do so. That is plain silly, as though somehow I did not know that my job gives me an income through which I can support my family.
But even here, it gets worse. Herbert does not understand that a u201Cjobu201D is not a u201Cmagic potionu201D in and of itself. A job is nothing more than a task someone performs in the production of goods. In order to have income, we have to produce something, and for production to be sustainable, over time it must reflect the desires and spending directions of consumers and to be sustained, it must be profitable.
Unfortunately, Herbert is demanding that the government create what Peter Schiff so aptly has called a u201Cphony economy.u201D Throughout his career as a journalist, Herbert has championed policies that make production of goods consumers want to be difficult, and he now calls for government to use vast amounts of resources to make products that consumers don’t want, and to force consumers and producers to pay for these products, anyway.
Indeed, if this is u201Cmagic,u201D it is a perverse magic in which government takes productive resources and u201Cmagicallyu201D transforms them into resources that are unproductive. He might say this is a u201Crich nation,u201D but it won’t be rich for long if influential people like Herbert continue to demand that government replace the productive economy with one that is phony.
William L. Anderson, Ph.D. [send him mail], teaches economics at Frostburg State University in Maryland, and is an adjunct scholar of the Ludwig von Mises Institute. He also is a consultant with American Economic Services. Visit his blog.