Sunday, October 23, 2011

A Reminder Of The Fundamental Flaw In Government Stimulus Programs

Here's another recent Wall Street Journal Notable & Quotable that deals with current US federal government financial problems. But it quotes someone from quite long ago, reminding us that government stimulus plans typically overlook something:

"Frederic Bastiat on justifying government spending only based on 'that which is seen,' while ignoring 'that which is not seen.'

French economist Frederic Bastiat in "That Which Is Seen, and That Which Is Not Seen," 1850:

I lose patience, I confess, when I hear this economic blunder advanced in support of . . . a project. "Besides, it will be a means of creating labor for the workmen."

The State opens a road, builds a palace, straightens a street, cuts a canal; and so gives work to certain workmen—this is what is seen: But it deprives certain other workmen of work, and this is what is not seen.

The road is begun. A thousand workmen come every morning, leave every evening, and take their wages—this is certain. If the road had not been decreed, if the supplies had not been voted, these good people would have had neither work nor salary there; this also is certain.

But is this all? Does not the operation, as a whole, contain something else? At the moment when M. Dupin pronounces the emphatic words, "The Assembly has adopted," do the millions descend miraculously on a moon-beam into the coffers of MM. Fould and Bineau? In order that the evolution may be complete, as it is said, must not the State organize the receipts as well as the expenditure? Must it not set its tax-gatherers and tax-payers to work, the former to gather, and the latter to pay?
 The sophism which this work is intended to refute is the more dangerous when applied to public works, inasmuch as it serves to justify the most wanton enterprises and extravagance. When a railroad or a bridge are of real utility, it is sufficient to mention this utility."

These latter paragraphs make Bastiat's point- projects worth society's capital need not wait for nor depend upon federal government funding. Excepting cases of military spending and wartime efforts like the Manhattan Project, the long term economic benefits of which, outside of defense purposes, I am not specifically aware, there isn't any significant government spending which can't be undertaken by the private sector instead.

Currently, federal funding is used as a substitute for state and local funding, because the latter two must typically run balanced budgets. Roads, government building such as schools, and even public employees, are all potential uses to which scarce state and local taxpayer dollars must be allocated. To simply declare them all vital and rely on federally-sourced, borrowed money, is to ignore Bastiat's insight that the better projects are already being funded locally.

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