Acton Commentary

The Abracadabra Stimulus Plan


The $787 billion economic stimulus President Obama signed into law this week rightly recognizes that spending stimulates the economy. That measure, however, misses the mark: It is targeted, demand-driven consumer spending is the engine that grows economies, not frivolous government spending for future “needs.” We have forgotten what Harvard economist and past president of the American Economic Association, Frank Taussig, told us in his 1911 book, Principles of Economics: “We must accept the consumer as the final judge.”

As recent history teaches, economic crises arouse an emotional panic that tempts us to believe that centrally planning the economy is the medicine for economic recovery and the best safeguard against future volatility. To make matters worse, spin doctors lead anxiety-laden people to believe the notion that without government oversight we are doomed. This history displays a major moral temptation of economic crises: a prideful belief in our capacity to “save” the economy by controlling the decisions of the millions of human beings who participate in it every day.

The panic of the Great Depression provided incentive for the founding of the Cowles Commission for Research in Economics in 1932 by businessman and economist, Alfred Cowles. The Cowles Commission attempted to link economic theory to mathematics and statistics. Henceforth many economists operated on the misguided presumption that they could predict the future preferences of consumers using math. This wizardly attempt to pair mathematical equations to the future desires of 300 million people exhibits the same kind of hubris that underlies the idea of spending billions of dollars to create artificial demand for so-called “new jobs.”

On April 19, 1933, in one of the initial attempts by government to manage the economy, the United States went off the gold standard by a presidential proclamation. Franklin Roosevelt nationalized gold owned by private citizens and abrogated contracts in which payment was specified in gold. Nearly 445,000 newly minted gold $20 "Double Eagle" coins were destroyed. On June 5, 1933, Congress voided any and all gold clauses in public and private debts.

In 1936, John Maynard Keynes published The General Theory of Employment, Interest and Money suggesting that the classic model that Taussig supported was a special case and applied only in times of full employment. At volatile and anxious times, Keynes asserted, the economy needed an activist government to create full employment. Tinkering by sage public officials would be more successful than the free operation of economic actors, human persons. Keynes advised governments to increase money supply to overcome depression, a recommendation that influenced the New Deal and one that echoes in Obama’s recovery plan.

On November 11, 1940, Frank Taussig died and with him died the common sense that the consumer is the final arbiter of economic growth because consumers trade cash for goods and services that they desire. Obama’s plan to create 3.5 million jobs, many of which will come from transportation, environmental, broadband and other infrastructure projects, seems to misunderstand this key principle. For example, why don’t “green jobs” exist? Perhaps the jobs do not exist because Americans do not want “green” products. Is it wise, then, to invent preferences that people do not have? Creating jobs that are not in demand, and making expensive products that people do not want or need will not stimulate the economy in the long run. It is simple pride that attempts to rework the character of the economy into an image that fits better one’s own ideological proclivities.

House Speaker Nancy Pelosi (D-CA) said the stimulus bill is a deposit on the nation's progress. “By investing in new jobs, in science and innovation, in energy, in education...we are investing in the American people, which is the best guarantee of the success of our nation,” she said. Is throwing cash the country does not have at programs without proven success really “investing?” Is this experiment not overly burdensome to generations of grandchildren who will be left to pay the debt?

Whatever legislative incantation lawmakers use to attempt to change future consumer spending preferences, as long as consumers feel insecure about their futures the economy will remain sluggish. Real needs must be permitted to create real demand, and thus truly sustainable jobs. Arrogance leads politicians to think that they can fix the economy by waving the wand of government spending. But magic economic spells do not work, and will only create the conditions, a generation hence, for a perceived need for yet another government stimulus package.


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