By William Anderson View all 12 articles by William Anderson Published 10/12/09 
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I live in a rural area, but on my way to work each day, I have the choice of which line of traffic do I wish to face. If I go by way of U.S. Alt. 40, I can be delayed, and if I choose I-68, I can take my chances as the freeway is cut to one lane. What do these things have in common, except to delay traffic? They are products of the American Recovery and Reinvestment Act, better known as "The Stimulus." The project on Highway 40 involves remaking drainage ditches on the eastern side of Big Savage Mountain to deal with a pretty non-existent problem, and the work on the interstate is the placing of rolls of new sod to cover a narrow median strip that is bisected by a guardrail. (Grass already is growing on the median, but apparently that is not good enough, as the Powers That Be insist on making it look like a newly-groomed athletic field.) One can say with confidence that these are two very wasteful projects, yet as the effect of the "Stimulus" begins to dissipate, we are hearing the Usual Suspects (i.e. the New York Times and its champion of printing money, Paul Krugman) call for "Stimulus II," or what writer Sheldon Richman derisively calls "Son of Stimulus." To anyone with even a tiny grounding in serious economic thinking (Keynesianism does not count as being "serious"), the notion that "Son of Stimulus" would have any better effect than its Dear Old Dad is akin to treating alcoholism by advocating the "Hair of the Dog" as a "cure." Assume, for a second, that a person who finally wishes to kick the habit of excessive alcoholic consumption stumbles into an Alcoholics Anonymous meeting. Expecting to hear stories of how people have managed to stay On the Wagon, the person instead hears the people at the meeting describe how they deal with the morning hangover — by taking another drink, and the more the better. Obviously, if AA participants were offering "Hair of the Dog" as a way to deal with alcoholism, it would not be long before that particular chapter would be under scrutiny. Likewise, when someone checks into the Betty Ford Center to deal with drug addiction, the staff does not try to ensure that the new patient stays high on heroin for the entire stay. This would be seen for what we know it to be: fraud. Yet, "respected" economists claim that what the U.S. economy really needs is another "Hair of the Dog," and I can say with complete assurance that what they are advocating is as fraudulent as the staff at the Betty Ford Center claiming that the way to beat drug addiction is to get high on more drugs. The problem centers around their understanding — or lack thereof — as to what an economy really is. In the real world, the "economy" is the arena in which people deal with the Law of Scarcity by producing and distributing goods meant to meet the various needs that people have. People become sick, so we produce goods to help cure them or to ease their suffering. People are hungry, so we find ways to produce food, and so on. An economy is a complex set of goods, both producers’ goods and consumption goods, and their interrelatedness is the area of study which real economists examine. The late Paul Heyne, the author of a popular text and a well-regarded teacher, once said that in order to understand what is going wrong in an economy, the economist first has to understand what a well-performing economy is doing. Likening the economy to a smooth-running automobile engine, Heyne said that a mechanic has to know how the various parts operate and how they can malfunction. During the various economic booms, the economy seems to be running well, perhaps too well. Just as my car cannot long uphold speeds of 100 mph before burning out, a boom is destined to end in a bust precisely because it cannot be sustained. Why is that so? It is because the economy — like a car engine — has various parts, or what we might call fundamentals. Those fundamentals come unglued during the latter stages of the boom, as it becomes clear that investments cannot continue to be thrown at that particular economic sector that has been booming. (The housing meltdown is Exhibit A here.) When that occurs, economists that understand why the problem is occurring will advocate that the malinvested capital be permitted to liquidate so the proper balances in the economy can be restored.) Unfortunately, that view is not the current "mainstream" view in modern academic (or business) economics. Instead, we have the Keynesian viewpoint prevailing, and the Keynesians scoff at economic fundamentals, preferring to see an economy as one big "blob" into which the government pours money. Their "Hair of the Dog" view of government intervention is something akin to the answer that Aaron gave Moses in the Book of Exodus after Moses came down from Mount Sinai to find the Israelites worshiping a golden calf. Aaron told Moses that he simply threw gold into a fire and "out came this calf." Likewise, Keynesians believe that government and individuals throw money into the "blob" known as the "economy" and out comes prosperity, and the more money that government prints and throws into the "blob," the more prosperous that "economy." According to this viewpoint, all assets, all capital, and all produced goods are homogeneous, so it does not matter where one throws the money, just as long as government prints it and distributes it. This is like taking your car to the mechanic because your engine is sputtering and he recommends that the "cure" is for you to put on new brakes because, after all, all car parts are "homogeneous." In the real world, we would laugh derisively at any mechanic who offered such advice just as the Betty Ford Center would go out of business if its staff tried to cure drug addiction by telling everyone to take heroin. Yet, when economists offer similar advice, they are taken seriously, and some of the worst offenders are given the highest praise. So, if "Stimulus I" is bad, you can bet that "Stimulus II" will have even worse effects. Like the "Hair of the Dog," it might relieve some of the symptoms of the hangover for a short time, but afterward, the patient (economy) is even worse off than before. The U.S. economy does not "need" a "second stimulus." What it needs is for the Congress to understand that we cannot spend our way out of this mess, and the more the government prints money and throws it into the mix, the more the fundamentals of the economy will get out of balance, and the longer it will take for an economic recovery to occur. Just as the Betty Ford Center would laugh at a prospective drug counselor who recommends double doses of heroin as a cure for drug addiction or an auto shop would refuse to hire a "mechanic" who believes that all car parts are homogeneous, Americans need to reject the advice of "economists" who apparently believe that the "Hair of the Dog" is just what the doctor ordered to bring our economy back to life. As long as the Keynesians have sway, the American economy will continue to sink into a morass, and the more likely it is that this country will experience the same fate as did once-wealthy Argentina half a century ago. High inflation and high unemployment do not have to be our future. There is a way out, but we have to listen to the Austrian Economists, not the Keynesians. The U.S. economy needs sound money and sound policies based on economic reality, not a fanciful belief that the "Hair of the Dog" will cure our ills. Copyright © 2009 Campaign for Liberty |
Also by William Anderson:
Did Stimulus Stop the Depression? 11/16/09
The Fallacies of Another New Deal 10/30/09
Don't Cry for Us, Argentina 10/27/09
Is a Weak Dollar a Strong Sign? Not So Fast! 10/21/09
Obama's Medical Collectivism 09/16/09
View all 12 articles by William Anderson
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