Politicians left and right are jumping on the "stimulus" bandwagon, and several
commentators have recalled Richard Nixon's famous 1971 remark, "We're all
Keynesians now." The famed British economist John Maynard Keynes died in 1946,
so what he would have thought of Nixon's economics must forever remain a
mystery. But if "Keynesian" is shorthand for believing that governments can
boost employment and keep the economy humming by stimulating demand through
deficit spending, then the political landscape today is indeed awash with
Which makes this a good time to recall an observation associated with another
famed economist, the late Nobel laureate Milton Friedman: "There ain't no such
thing as a free lunch."
With the economy weakening, home and stock values sinking, and recession fears
growing, pols of every stripe have been hustling to put a "stimulus" plan on
the table. The Bush administration is calling for temporary tax relief worth
about $140 billion, reportedly in the form of tax-rebate checks of up to $800
per taxpayer. Several of the candidates vying to succeed George Bush are
weighing in with giveaways of their own. Barack Obama, for example, wants to
send $250 checks to low- and middle-income earners and to seniors on Social
Security, followed by a second round of $250 checks if the first doesn't do the
trick. Hillary Clinton, who on Monday dismissed Bush's package as "too little
too late," proposes to spend $40 billion on rebate checks and another $70
billion on new housing, energy, and unemployment benefits.
The idea behind these plans is to get money into the hands of consumers who
will spend it quickly, thereby revving up demand and "stimulating" the economy
back to good health. There's just one problem: There ain't no such thing as a
Sure, if you get an $800 kiss in the mail from Uncle Sam, you're likely to
spend it on something maybe even something you might otherwise have taken a
pass on: kitchen cabinets from Home Depot, say, or a trip with the kids to
SeaWorld, or a donation to Special Olympics. That $800 will continue to
circulate in the economy as each recipient spends it on something else, each
time adding another $800 worth of economic activity to the nation's GDP.
But where did that $800 come from in the first place? Does the federal
government, like Scrooge McDuck, have great warehouses filled with surplus
money it can spread around when recession clouds appear on the horizon? Of
course not. Washington already spends more money than it has; just three months into
the new fiscal year, the budget deficit is already up to $107 billion. And since no
one is proposing to pay for a stimulus package by curtailing other spending, the
only way Uncle Sam is going to come up with your $800 is to borrow it.
In other words, before any money can be injected *into* the economy by means of
rebate checks or other benefits, it must first be extracted *from* the economy
by means of borrowing (or taxation). That $800 you spend at Home Depot or
SeaWorld is $800 not available to the bond buyer who lent Uncle Sam the money
for your rebate check. Washington cannot jump-start the US economy by taking
money from Jane and giving it to Joan any more than I can boost my own
prosperity by withdrawing money from a downtown ATM and depositing it in an
uptown ATM. There's no free lunch.
One talking point most of the would-be stimulators seem to agree on is that any
plan to goose the economy must be short-lived. It "must be temporary and take
effect right away," Bush said on Friday. House Speaker Nancy Pelosi likewise
called for "a solution that is timely, targeted, and temporary." A Google News
search yields thousands of stories containing the words "stimulus," "economy,"
But if Washington really has the power to restore vim and verve to the nation's
economy by simply moving money around, why not do so all the time? Why should
there ever be an economic slowdown if government spending can prevent it?
Here's why: Because the business cycle hasn't been repealed. Because booms are
still followed by busts. Because politicians and policymakers cannot make a $14
trillion economy jump through hoops on demand especially not by going even
more deeply into debt.
The fuel of economic growth is the creation of new wealth, not the
redistribution of existing wealth. Rebating some of last year's taxes or
expanding welfare-like benefits won't encourage anyone to be more productive.
Permanently lowering tax rates letting Americans keep more of the money they
earn, this year and every year will.
True, tax cuts instead of tax rebates would mean no kiss in the mail from
Washington. And needless to say, most politicians would rather treat you to a
free lunch than stimulate you to work, invest, and take more risks. Just
remember one thing about that free lunch: There ain't no such thing.