Unforeseen

With the impending passage of a massive $800 billion dollar "stimulus" bill working its way through congress, I'm beginning to wonder if most people are a whole lot dumber than I previously thought.

In 1848 Frederic Bastiat wrote and essay titled What is Seen and What is Not Seen.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

Apparently the Democrats cannot foresee the later consequences of this legislation, or don't give a damn.

John H. Cochrane, the Myron S. Scholes Professor of Finance at the University of Chicago Booth School of Business recently wrote a paper titled Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies? Cochrane begins by debunking three fallacies of fiscal stimulus:

Most fiscal stimulus arguments suffer from three basic fallacies.

First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out.”

Second, investment is “spending” every bit as much as consumption. Fiscal stimulus advocates want money spent on consumption, not saved. They evaluate past stimulus programs by whether people who got stimulus money spent it on consumption goods rather save it. But the economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift.

Third, people must ignore the fact that the government will raise future taxes to pay back the debt. If you know your taxes will go up in the future, the right thing to do with a stimulus check is to buy government bonds so you can pay those higher taxes. Now the net effect of fiscal stimulus is exactly zero, except to raise future tax distortions. The classic arguments for fiscal stimulus presume that the government can systematically fool people.

The central question is whether fiscal stimulus can do anything to raise the level of output. The question is not whether the “multiplier” exceeds one – whether deficit spending raises output by more than the value of that spending. The baseline question is whether the multiplier exceeds zero.

A cure should have something to do with the diagnosis. The classic argument for fiscal stimulus presumes that the central cause of our current economic problems is this: We, the people and our government, are not doing nearly enough borrowing and spending on consumer goods. The government must step in force us all to borrow and spend more. This diagnosis is tragically comic once said aloud.

Cochrane goes on to draw out some of the potential consequences of current government policies:

"It matters tremendously which path we choose. At some point the crisis will pass, and demand for Treasury debt and money will revert to normal levels. Sooner or later, investors and banks will decide they’re sick of holding $850 billion of reserves and 2% Treasuries when high-rated corporate bonds are going for 9% and tax-free municipal debt is going for 6%. Sooner or later banks will figure out that borrowing deposits at 4% and holding reserves that pay 0.75% is not a good long-term business model. If the resources are not there to unwind our current operations, to quickly retire at least two trillion dollars of newly created debt, a large inflation will result as people dump government debt. If history is any guide, this outcome will unleash economic dislocations on a scale to make our current troubles look like a pleasant memory. "

Lastly, Cochrane deftly shines light on the political motivations behind "stimulus" policies:

Fiscal stimulus can be great politics, at least in the short run. The beneficiaries of government largesse know who wrote them a check. The businesses and consumers who end up getting less credit, and the businesses that can’t sell them products, can only blame “the crisis,” and call up their congressmen to get their own stimulus. Roosevelt understood this, and his biggest stimulus came as political support was flagging. But President Obama has such widespread support, he doesn’t have to buy votes any time soon.

Sadly, Americans are like Bastiat's "bad economist". The can only see the immediate, favorable consequence of what the politicians and media tell them. They cannot foresee later, disasterous consequences.