Micro-Stimulous

by Joshua Katz
by Joshua Katz
Recently by Joshua Katz: The State and Piracy

This morning, I attended orientation at the university where I will study and teach for the next few years. The orientation organizer mentioned, in an offhand way, that in previous years, attendees had been provided with snacks, coffee, and lunch, but that due to budget difficulties, no food would be provided today. Although my fellow attendees may not have been happy about this (all else being equal, people prefer to be given things), they all nodded understandingly, and murmured statements about the economy. All expressed bafflement at the economic situation, apparently having been too immersed in their studies to notice Ron Paul, Peter Schiff, or Tom Woods warning them of the coming collapse. Many made statements indicating their beliefs that "things were turning around." Some, I’m sure, likely believed that "things were turning around" due to Bush/Obama economic policies, although I’m sure that absolutely none would phrase their belief that way. However, on reflection, it occurred to me that, if it makes sense to you that a university suffering a budget crunch would decide not to provide a few hundred meals and snacks, then you absolutely cannot believe in stimulus economics without believing in a contradiction. Please, let me explain.

Imagine that you are a university administrator planning an orientation event. Having been informed that the university needs to cut costs, you ask your staff "what do you think about cutting meals?" All nod, except the student intern. This intern, who happens to be an economics student, provides the following argument:

"Who needs to cut costs, exactly? Certainly not just us – rather, the entire university needs to cut costs. But it would be just as good – better even – to instead increase revenue. What really matters is not costs as an absolute, or revenue as an absolute, but profit, which is revenue minus costs. Very well – so we need to analyze this decision in terms of the university as a whole. Now, in past years, where have we bought meals from?"

At this point, deciding to humor the intern, you inform him that meals have been purchased from campus dining services.

Continuing his argument, the student proceeds:

"Let’s look at the meal purchasing transaction, then. Step one is we pay, say, $5,000 to dining services. As far as the university is concerned, there’s no loss here – we transferred $5,000 from one department to another, so no cost has been incurred. Step two is dining services sends up $5,000 worth of food. Now, again, from the standpoint of the university, items have been transferred from one department to another, and no cost has been incurred. But, in fact, it is incomplete to simply say that things are no worse than they were before the transaction took place – things are better! Why, notice that dining services purchases their supplies from other campus vendors, namely, the campus dairy and the campus farms, and that dining services has a higher marginal propensity to spend than we do – so we’ve stimulated the campus economy. In fact, we should buy more food than last year, and if we buy enough, we’ll single-handedly solve the entire budget problem!"

At this point, we can assume, everyone in the room with a lick of sense – especially those who are not burdened by a college education – will begin to laugh hysterically. The more erudite will point out the obvious problem – the food will be eaten, and while the school will have the same amount of money floating around, it will have fewer assets. It will either have to spend money to replace those assets, or simple have fewer on hand. In any case, the point is obvious – you can’t have your cake after you’ve eaten it. It turns out, then, that you cannot consume your way to prosperity.

Again, no one at all, except an overly enamored economics student, would think this argument makes sense. The student will, hopefully, sneak out the room, red-faced but having learned a lesson in just how much economic sense he has lost through his education. Furthermore, adding more businesses to the university makes the argument no more convincing. The student already added a third link the chain, as it were, moving the loss of assets down to the university dairy and farms. We could add a fourth link, presuming that the university also maintains power plants, oil pumps, and facilities to make its own fertilizer. The argument will remain implausible.

Let us, then, add the entire US economy, one item at a time, to the university. In our minds, we let it grow to include, as separate departments, each business and household in the country. Presumably, at any stage in the process short of having added the entire economy, we can bring the intern back into the room, have him present his (now much longer) argument, and verify that, indeed, he is still laughed at. It follows immediately, then, that anyone laughing at the intern’s argument should laugh just as hard at any politician proposing a "stimulus package" or a "cash for clunkers" or any other such ludicrous program.

One might object, though, that I have only brought the intern in at a stage prior to the complete incorporation of the US economy into the university – might not something change once the entire economy is added that makes the argument correct? In other words, couldn’t something happen at that particular stage that was not predicted by the previous stages? Notice, though, that the same can be said of any stimulus package that a politician suggests – regardless of what emanates from Washington, I plan to continue to increase my savings and cut my spending. Thus, any stimulus plan will necessarily not include my household in the chain, and therefore, if some property did come about whereby a stimulus package could work for the whole country, but not any proper subset, nonetheless, no stimulus package would work. (Don’t make the mistake, of course, of presuming that I think such a quality exists; I’m simply arguing that even if it did, it wouldn’t help the stimulus case.)

My point is not, of course, that stimulus packages don’t work – we all know that. My point is not to ignore all the specific damage they do, as can be seen on a business cycle analysis. My point is only that, not only do they not work, but every person who votes for a politician who proposes such packages, or cheers such packages, or thinks that such a package has "pulled our economy out the mess" (they have no idea what suffering we’re in for in the near future) knows, in a smaller context, how ludicrous such an idea is. Every Obama voter would have laughed at the intern’s argument, yet somehow they think that, by adding enough links to the chain, such an argument can be made plausible. All that is left to convince them, then, is that the facts do not depend on the length of the chain.

August 28, 2009

Joshua Katz, NREMT-P [send him mail], is the Legislative Director and Secretary of the Libertarian Party of Connecticut. A graduate student and college instructor, his areas of interest include mathematics, logic, non-linear dynamics, philosophy of mind, and the use of the synthetic a priori.

Copyright © 2009 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

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