Sunday, December 21, 2008

Are "Bailouts" and "Economic Stimuli" Effective?

Of course not.

Unless you define "effective" as the compulsory transfer of property from a productive person to another who has not earned it.

And, unless you define "effective" as reducing overall wealth; e.g., "The economic stimulus has was effective in making people poor."

Let's examine a simple case where there are only three people in the world; you, me, and a politician. And let's say that you grow potatoes, I do nothing, and the politician does politics. One day, the politician declares that the economy of our three-person society will be better off with a "stimulus" comprised of you giving me a large bag of potatoes. The idea, according to the politician, is that I will spend my new wealth -- which will "stimulate" the economy.

OK, I then spend my new wealth on...well, your potatoes -- because that's the only thing to buy in our world. We can obviously simplify this process by declaring that some of what you produce must be given to me. This makes me richer and you poorer, with a net effect of zero. Unless, of course, you grow tired of wasting your effort to produce things for ungrateful people who choose to not work, and you cut back on potato growing. In that case, the net effect of the "stimulus" is negative. That is, I am richer -- but you grow more poor than I have grown rich.

But the politician might say that if I was loaned a few potatoes, as in a "bailout", I would then have the energy to create a potato-mashing machine that would make everyone better off. However, if my machine would make you better off, then you would voluntarily lend me potatoes so that I could make my machine. The fact that the politician is forcing you to give me potatoes ought to set off alarms about the viability of my machine plans.

The real world is obviously more complex that this example, but the principles are the same:

1. The net economic effect of taxation (i.e., forcibly transferring things from the productive to the unproductive) is, at best, zero -- and is probably negative.

2. The morality of the above point is summed up in a word called "stealing". Or, if you resist the theft, you can add the terms, "aggravated harassment", "menacing", and "assault".

3. Back to economics, encouraging people to buy things makes others worse off. If the "economic stimulus" money is used by the unproductive to buy things, then there will be fewer things for the productive to enjoy. The only way to increase affluence is though abundance, and the only way to increase abundance is through production. And if the recipients of "stimulus money" are not producing, then there will be no increase in wealth.

Now, one might say, "Hold on fella, poor people need the money!"

Misleading as that assertion is, it is also unrelated to the stated purpose of a stimulus. You can try using the "poor people" argument to defend taxes, but that is not the same as a "stimulus" argument. And so are other irrelevant arguments, like taxation to correct for externalities. Whatever the merits of those arguments, they are nevertheless unrelated to a general "economic recovery" by way of taxation.

Why, you might ask, does not the citizenry therefore reject the demands of stimuli and bailouts? Because the appeal of utopia is too attractive to decline.

No comments: