Jewish World Review Feb. 13, 2003 / 11 Adar I, 5763
Robert W. Tracinski
Bad economics in one lesson
http://www.NewsAndOpinion.com | On Tuesday, the Economic Policy Institute (EPI), a left-leaning Washington think tank, published a full-page ad in The New York Times condemning the proposed Bush tax cuts. This pro-tax statement is signed by more than 400 economists, including 10 Nobel laureates -- for what that's worth.
Apparently, it's not worth very much, because the economists' statement is a classic lesson in bad economics.
The EPI economists oppose cutting taxes because that would mean "a permanent change in the tax structure and not the creation of jobs and growth in the near-term." What, then, is the right approach? "To be effective, a stimulus plan should rely on immediate but temporary spending and tax measures to expand demand, and it should also rely on immediate but temporary incentives for investment." Their mantra is "immediate but temporary." The basic message: think short-term.
In his classic 1946 book "Economics in One Lesson" -- an amazingly clear and eye-opening introduction to free-market economics -- Henry Hazlitt described the "one lesson" required for good economics. "The art of economics consists in looking not merely at the immediate but at the longer effect of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups." The basic message: think long-term.
Most of today's economists have never learned Hazlitt's one lesson. Instead, they are followers of his more famous contemporary, John Maynard Keynes, whose philosophy was expressed in his famous quip that, "In the long run, we'll all be dead." Based on such shallow wisdom, today's economists feel free to ignore anything but the shortest of short-term consequences.
This focus on the short term, for example, leads the EPI economists to tell us that our first priority should be to "expand demand," i.e., boost immediate consumer spending. But immediate spending only uses up the inventory of goods that have already been produced. The decision to produce new goods -- the decision to spend current revenues to build factories and hire workers -- is a matter, not of consumption, but of investment. These investment decisions are what drive the economy in the long term -- and they are made based on returns projected one year, or three years, or 30 years into the future. They are made with the long term in mind.
The stubbornly myopic outlook of today's economists is expressed in the absurd call for "immediate but temporary incentives for investment." Investment, by its nature, is that which is not "immediate but temporary."
To increase the long-term reward for investors, what we need is precisely a "permanent change in the tax structure." This is particularly true of the proposal to eliminate taxes on stock dividends, a move that would increase the value of long-term stock holdings, an immediate and permanent incentive for investment. Yet the EPI economists single out this measure for special criticism, dismissing it as "not credible as a short-term stimulus."
After all, in the long run, we'll all be dead.
The EPI economists cling to one fig leaf of concern for future consequences: they say they are concerned about the "long-term budget outlook," i.e., deficit spending.
This is a legitimate failure of the Bush budget; it cuts taxes while only seeking to limit the growth of spending. Yet these economists are not really concerned about deficits; their real goal is to protect the welfare state. The problem, they say, is that deficits "reduce the capacity of the government to finance Social Security and Medicare benefits as well as investments in schools, health, infrastructure, and basic research." Note that they see no value in encouraging long-term private investment -- but heaven forbid that we should threaten government "investment" in middle-class entitlements and pork-barrel spending.
This is the deeper lesson of good economics. If the economist should look at remote consequences and the long term, economics itself must look at its ultimate consequences: the moral ends for which we live.
In the minds of leftist economists, the economy does not exist so that productive individuals can enjoy the fruits of their labors. It exists for only one purpose: to divert money from the successful to the unsuccessful. If these economists seek to "stimulate" the economy, it is only so that productive people can, temporarily, become more vigorous draft-horses to drag along a cart loaded with an ever-heavier crowd of unproductive hitchhikers.
What are the consequences of a social system that sacrifices our best producers for the sake of parasites? That is the long-term in which we will, in fact, all be dead.
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