Thursday, March 19, 2009

The Case Against Conscious Government Stimulus

The single greatest fact about capitalist society is that the great bulk of it appears to be the handiwork of a master designer but, in fact, is unplanned and even unimaginable before it becomes real and familiar. Remember this lesson whenever you hear alleged "experts" insisting that only conscious effort by government to "stimulate" demand can save the economy from its current downturn.

It's true that no one can know beforehand the precise path by which a free market travels to escape the downturn. No one can foresee that, say, entrepreneurs in Texas and Ohio will be especially creative at finding ways to produce things that consumers will open their wallets wider to buy -- and, hence, that these entrepreneurs will succeed at launching profitable firms that hire more workers.

No one can foresee exactly when, say, the increased efficiencies that the downturn obliges many established firms to pursue will make those firms again attractive to investors who then pump more money into them, enabling these firms to expand operations.

No one can foresee or predict any of the details about how recovery will happen. But economics and history tell us that our inability to foresee and predict -- or even to imagine -- how recovery will come in the absence of conscious government stimulus is no reason to conclude that recovery requires conscious government stimulus.

Yet, despite all of our experience with the marvels of free markets, the case for the massive government stimulus plans rests chiefly on people's fear that this time the market will fail. Why suppose that this situation differs from the countless other coordination challenges successfully met by market forces? I can think of no good reason other than the fear that oozes from biased imaginations. Despite experience that should teach us differently, we can imagine market failure much more easily than we can imagine just how markets will succeed.

~George Mason economist and blogger Don Boudreaux


At 3/19/2009 8:34 AM, Anonymous Anonymous said...

I go to your blog to glean optistic insights in a sea of dour news and prognostications. I suspect we are in general agreement on the virtue of economic liberty and the efficiency with which markets allocate capital (as opposed to the political process).

That being said, I am wondering what your view is of the increasing role of The Fed in the economy. What is to stop them from taking all debts- good and bad- off the hands of banks insurance Co's, and other financial institions in return for cold hard freshly printed cash. With consumer and financial debt safely parked on the Feds computer screen any payment will finance defecit spending via Treasurys while any default goes unoticed. So The Fed precedent is established; effectively a put option for overleveraged entities going forward. No transfer from weak hand to strong- just teh status quo with Ken Lewis emerging as one of the great Titan of Industry. Sad.

At 3/19/2009 8:49 AM, Blogger save_the_rustbelt said...

Has GMU made a public statement refusing any funds coming directly or indirectly from the stimulus?

At 3/19/2009 9:58 AM, Blogger Unknown said...

It seems to me the vast majority of people would rather sacrifice the potential for great personal gains than risk any personal loss. The villainization of corporate America and successful business people has left people with the idea that all businesses are simply out to enrich a few of the top executives and screw everyone else. It's sad that people can't see beyond the bad actors and recognize that generally a well-run company benefits all employees from the bottom up.

At 3/19/2009 10:39 AM, Blogger KauaiMark said...

It's worse given the current "UnConscious Government Stimulus" politicians like Senator Chris "I forgot I did it" Dodd

At 3/19/2009 11:30 AM, Anonymous Anonymous said...

The world reacts to US policy:

There is mounting evidence that China's central bank is undertaking the process of divesting itself of longer-dated US Treasuries in favor of shorter-dated ones.

There is also mounting evidence that China's increasingly energetic new campaign of capitalizing on the global crisis by making resource buys across the globe may be (1) helping its central bank to decrease exposure to the dollar, while (2) simultaneously positioning China to make much greater profit on its investment of its reserves into hard assets whose prices are now greatly beaten down, while (3) also affording it greatly increased control of strategic resources and the geopolitical clout that goes with it. This is turning out to be a win-win-win situation for China as it capitalizes upon the important opportunities afforded it by the present global crisis.


Once agian, the Chinese communists show themselves to be more competent than our communists.

Central banks hold their reserves in a variety of currencies and gold, but the dollar has dominated as the most convincing store of value -- though its rate has wavered in recent years as the United States ran up huge twin budget and external deficits.

Some analysts said news of the U.N. panel's recommendation extended dollar losses because it fed into concerns about the future of the greenback as the main global reserve currency, raising the chances of central bank sales of dollar holdings.


If Obama's recklessness costs the US it's reserve currency status, his chanting, idol worshipping, little minions will see their standard of living plummet. The "change" they'll get will be from relative affluence to poverty as the interest on the massive debt he has created skyrockets.

At 3/19/2009 1:22 PM, Anonymous Anonymous said...

The report indicates that spending by the departments of Labor and Health & Human Services will increase by 91 percent this fiscal year. The U.S. Department of Transportation, and the U.S. Department of Housing and Urban Development, will jump by 139 percent.

Interior and Agriculture -- mere paupers when it comes to budget hikes – will enjoy budgets 45 percent larger than they were last year. In other words, the budget footprints of Interior and Agriculture will swell by about half in a single year.

“It’s out of hand,” says Chris Edwards, director of tax policy for Cato Institute. “I think federal spending is more out of control now than I ever remember it in my 19 years in Washington. It’s completely unbelievable what is going on in Washington.”

Edwards, a former senior economist on the congressional Joint Economic Committee, says one of the ironies of the ballooning budget is that federal departments will have to hire thousands of new officials whose primary duty will be to find ways to spend the funds their departments have received.

“The federal bureaucracy frankly just doesn’t have the manpower to spend all this money in any kind of efficient manner in the short run,” Edwards says, “so they’re going to go hire a bunch of more bureaucrats to carry out the government spending.”


At 3/19/2009 1:27 PM, Anonymous Anonymous said...

Economic stimulus in China has been a whole series of iniatives starting in Novemebr 2008. They comprise of: A comprehensive new series of export credits; grants to new factories that use only Chinese made machinery; new tariffs and larger existing tariffs on imported machinery.

Our stimulus programs our reactive and not well thought out for the long term. For the Chinese it is a logical progression of their economic strategies. Of course many of the Chinese programs are not legal under World Trade Organization agreements.

At 3/19/2009 3:19 PM, Blogger misterjosh said...

This isn't a case at all, it's a lot of vague philosophical mumbo jumbo.

Mumbo jumbo I happen to agree with, but mumbo jumbo nonetheless.

At 3/19/2009 4:37 PM, Blogger juandos said...

"Yet, despite all of our experience with the marvels of free markets, the case for the massive government stimulus plans rests chiefly on people's fear that this time the market will fail. Why suppose that this situation differs from the countless other coordination challenges successfully met by market forces?

Personally I disagree with this in one sense...

Ignorance breeds fear and let's face it how many people even have a simple grasp of simple economics?


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