Monday, August 31, 2009

Government Spending Creates Wealth? The Most Persistent Economic Fallacy of All Time


At a 1978 lecture, Milton Friedman talks about government spending and explains one of the greatest economic fallacies of all time, essentially another version of Bastiat's "broken window fallacy."

HT: Drew Suder

Originally posted at Carpe Diem.

18 Comments:

At 8/31/2009 2:52 PM, Anonymous Anonymous said...

Counter Example the Erie Canal which was a New York State project. It made New York into the leading city of the US. Second counter example the Morril act which created the land grant schools and allowed us to get to where we only spend 9% of income on food. So its not all spending capital investments do pay off. Grand Colee dam provided the energy to make the Aluminum to build the bombers that won WWII

 
At 8/31/2009 3:48 PM, Blogger Buce said...

Hell, just think how much better off we'd be without the Center for Disease Control, West Point, the GI bill, the Interstate Highway system, the land grand colleges. And if only that damned Alexander Hamilton hadn't undertaken to pay the other guys' debts...

 
At 8/31/2009 4:02 PM, Blogger QT said...

One could also consider the impact of NASA on the U.S. economy which has largely been positive.

 
At 8/31/2009 4:27 PM, Blogger Shawn said...

1st 3 comments: point seems to have zoomed completely over your head.

Tell me of the unseen in those examples cited. Ah, can't do it, can you?

 
At 8/31/2009 4:55 PM, Blogger QT said...

Shawn,

I largely agree with Milton Friedman although large scale, capital intensive projects are an area that is difficult for the market to achieve. Obviously, one could easily point out that such work is usually sub-contracted to a number of private companies if that is the point you are making.

Would you do us the courtesy of making your point explicit?

 
At 8/31/2009 6:08 PM, Blogger Mayfield said...

Taxation is theft.

Stealing from one group (taxpayers) to benefit the entire society is wrong.

NASA-debunked
http://blog.mises.org/archives/007257.asp

 
At 8/31/2009 6:32 PM, Blogger OA said...

QT, I'm not sure of the specific point Shawn is thinking of.

But most of the examples given facilitated wealth creation in the private sector. They didn't create wealth on their own. Otherwise you could just build things in the middle of nowhere.

Other examples are non-economic benefits.

Friedman isn't answering the question "Is government spending good?", he's answering the question "Isn't it good for government to take money and give it to someone else (government employees) who is likely to spend it?"

The examples being given point to the fact that the spending itself isn't really helpful, it's what you get from it.

The stimulus bill was an example of the spending itself being sold as the goal. Longer unemployment benefits, money to help states keep or hire employees, the annual AMT fix, dog parks, bike paths, etc. These were all claimed to be stimulative because the workers/unemployed will then spend that money.

 
At 8/31/2009 7:37 PM, Blogger QT said...

OA,

Thank you for the distinction. From that standpoint, I would have to agree with Milton.

 
At 8/31/2009 7:54 PM, Blogger sethstorm said...


Longer unemployment benefits... ...These were all claimed to be stimulative because the workers/unemployed will then spend that money.

At this point, an extension may be the only viable option(at this time) if there's no willingness on the part of businesses to keep work in the US. When they stop click-n-shipping to the Third World, then there can be talk of returning to a normal schedule.

Perhaps some tax cuts are in order to hasten that day, but crackdowns on offshoring(and penalties to the non-US beneficiaries) would establish trust to the displaced.

 
At 8/31/2009 9:43 PM, Anonymous Anonymous said...

Economics 101: Now wait a minute. Help me with this. Didn't Friedman say here that wealth isn't created unless actual goods and services are created? When my stock increases in value there are no goods or services created, but we call it increased wealth, don't we?

 
At 8/31/2009 9:54 PM, Blogger Shawn said...

Sethstorm: really, with the protectionism? Hmm. Okay. I disagree, and I think it's fair to say that most non-vested-interest economists do also, but oh well.

QT: Aside from OA's point (multiplier effects, in short, correct OA...haha...my muscle memory keeps wanting to type OS, rather than OA...I'm such a computer geek), I was more discussing the 'broken window fallacy' of bastiat, mentioned by Mark. It's incredibly easy to point to a government program that spent money and achieves a tangible output. Even disregarding questions of efficiency in government spending (huge concession to make), there is still the question of where that money comes from, and what it, by very definition, can not therefore be spent on otherwise.

From Hazlitt's description of the broken window fallacy, it's the suit that the shop owner couldn't buy as a result of having to replace his broken window. Yes, it's easy to point to the fixed window and the money in the glazier's pocket, but the poorer-as-a-result-of-the-broken-window tailor is lost in the calculations.

I saw the first comments as largely pointing to the increased income of the glazier, and his employment of individuals or the extra benefits that somehow were given to society as a result of his window business. It's the UNSEEN, however, that Bastiat/Hazlitt/Friedman/Economists-in-general point out as being the problem with government spending.

 
At 8/31/2009 11:08 PM, Blogger QT said...

Shawn,

Thank you for your reply. Again, I pretty much have to agree with you.

Taxation does displace resources from productive activities whether one judges such activities to be worth it or not.

 
At 9/01/2009 8:22 AM, Anonymous Anonymous said...

But who would provide the Erie Canals etc when the business case fails. This is the Jeffersonian philosophy at work a very Democrat (Historic not current) point of view.
Most seem to think that Alexander Hamilton had looser ideas. Of course if he had not had his programs the US would by now be a set of countries possibly still ruled by Europe.
The interesting point is how the Republicans have become what the Democrats in 1800 where and the Democrats have become the Federalists.

 
At 9/01/2009 8:49 AM, Anonymous geoih said...

Quote from Anonymous: "But who would provide the Erie Canals etc when the business case fails.(?)"

So is your point that, if the evidence points to a venture being a waste of money, or at least not profitable, then the proper solution is to take the money from people at the point of a gun 9in order to pay for it, for their own good?

 
At 9/01/2009 8:58 AM, Blogger 1 said...

"One could also consider the impact of NASA on the U.S. economy which has largely been positive"...

No, not anymore...

Let Burt Rutan explain it...

 
At 9/01/2009 10:04 AM, Anonymous Junkyard_hawg1985 said...

Here is my view of government spending in the economy. Lets say the patient needs blood. The hands and feet are weak from the lack of blood. A doctor pumps blood into the hands and feet to give them more strength. It works as the hands and feet show an immediate improvement. Unfortunately, blood doesn't just appear and the doctor must get it from somewhere. It this case he takes the blood from the patient's arm. The doctor points to the stronger hands and feet, but misses the fact that the rest of the patient is in worse shape than it was before.

Case in point: Cash for clunkers. Dr. Congress took blood (money) from the patient (general economy) and concentrated it in the hand (auto industry). The hand looked better, but the rest of the patient looks worse. When July retail sales were reported, auto sales increased by 2.4%. Retail sales for the rest of the economy fell by 0.6% giving a net drop in retail sales of 0.1%.

The inefficiency in government (managing C4C plan) is like a leaky tube transferring the blood so the net effect is a patient that now has less blood.

 
At 9/01/2009 11:40 AM, Blogger QT said...

1,

Thanks for the link. Interesting video.

The moon we left behind

 
At 9/01/2009 10:53 PM, Blogger task said...

Building important or necessary infrastructure that benefits all of us is what a government should do with tax dollars saved or debt earmarked to be paid off. It is not spending designed for the short term that could be done by the private sector or to benefit some at the expense of others. Otherwise we could just throw some parties and the economy would flash and then flicker & die leaving some very costly unpaid bills. This is not stimulus; it rewards patronage and solidifies votes to insure control. Most of all it wastes the financial resources that the private sector can't wait to use for what it knows best will help itself. That is how profits are made and without profits you have nothing to tax.

 

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