Flashy ‘stimulus’ projects conceal truth that the state destroys wealth

During the round of “stimulus” spending two years ago, federal bureaucrats figured out how to stimulate the sign industry. They instructed states to spend millions of dollars for signs to post on highway projects telling motorists that the projects are funded by “stimulus” spending.

The example is outrageous, but it’s symptomatic of bureaucratic political thinking in monopoly situations. Getting the job done in the least expensive possible way wasn’t the priority. Clearly, the priority was delivering a political message. Although nobody can put a dependable figure on the cost of all those politically motivated signs, it’s clear that they cost millions of dollars — but why would anybody worry about spending small change like that?

Actually, many mainstream (Keynesian-influenced) economists wouldn’t complain about the cost. They’d say that the spending employs sign makers and installation workers — who pay taxes and spend their income — so it “obviously” has a “stimulative” effect. That’s the Keynesian theory that led the Fed and the U.S. government to pour money down various ratholes in the past few years.

Is all of the “stimulus” spending the equivalent of paying people to dig ditches and refill them (or post signs with a useless political message)? Of course not. Some sizable percentage of it ends up being spent for things that are nice (or at least, sort of nice) to have. Some roads get repaired or expanded. Some downtown areas get spruced up. Some playgrounds get built. It’s not bad stuff, but the things that are seen are just part of the story. What’s unseen is the part of this story that nobody talks about — and it’s a point that French writer Frederic Bastiat famously made in his 1850 story about a broken window. (Please take three minutes to read Bastiat’s story. It will help you understand the rest of what I have to say.)

The story is essentially this. A careless kids broke a window and his father was unhappy about having to pay to fix it. But some people around said that it was a benefit to the community, because the father has to pay the window repair guy, who will spend some of the money with various other people in town for things he needed — circulating the money and increasing prosperity for everyone. That sounds reasonable on the surface, doesn’t it? But Bastiat continues:

“It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way which this accident has prevented.”

So the relevant point is that whatever government spends, that is money that the people who otherwise would have kept their money can’t spend as they would have chosen to spend it.

Government has only three ways of getting the money it spends. It can take money from people by force or threat of force. It can inflate the money supply by creating new money. Or it can borrow money. All three take money out of people’s pockets, just in different ways. Government doesn’t have anything of its own to spend. It’s always your money — if you’re a taxpayer.

But surely it’s a good thing if governments create jobs, because they’re paying otherwise-unemployed people to do projects — some probably useless and some possibly useful — and that puts money into the pockets of those people to spend at grocery stores and other places. That’s a good thing. Right?

That’s the part we see about “jobs creation.” What you don’t see is that when money is taken from others in the economy, it reduces their spending. The money that governments take to pay for their inefficient make-work jobs is money that otherwise would have been left in the hands of the people who rightfully own it — and they would have spent it or invested it otherwise.

In other words, every penny you take from taxpayers is a penny that those taxpayers don’t have available to spend in the free market — and in a properly functioning market (free from state intervention), the activities of those people produce the spending and investment to create the jobs because of their natural economic activity. Every time you take away the ability of those people to engage in their own economic self-interest, you destroy the ability of the free market to create the jobs that you claim to want.

Not only that, but the market is naturally efficient as compared to top-down economic planning. A much higher percentage of the money is going to go toward productive use if it’s spent by self-interested individuals than if it’s dictated by bureaucrats. So if the top-down command system generates one job with X dollars, a completely free market would have generated two jobs, for instance, with the same X dollars. You can argue over the exact ratio, but no one reasonable would argue that the state is more efficient at economic planning than the market. If it were, the Soviet Union and its glorious people’s republic client states would be thriving instead of heading toward being footnotes in history books.

The number of things that Keynesians believe are “stimulative” is downright insane. As I discussed a few days ago, the Keynesians — including my favorite insane and angry economist, Paul Krugman — believe that World War II ended the Great Depression. At one time, they touted the spending that FDR did as part of the New Deal as the thing that had ended the Depression, but when it became clear that that spending actually hurt the economy, they fell back to a different kind of state spending — guns and other weapons to kill millions of people.

More recently, we’ve been told that the Gulf oil spill in 2010 was going to be good for the economy. Despite the damage, it was going to be a slight net positive, we were told, because so much spending would be done to clean the spill that the economy would be better than if the spill hadn’t happened.

Some people told us that the disaster related to the Fukushima nuclear power plant disaster would spark an economic boom later this year.

If these claims are true, why don’t we tear down cities intentionally, blow up oil wells and destroy nuke plants on purpose? After all, they’re supposed to be net positives. By this logic, we can save the world economy by destroying everything. Think how much spending would be required to do that. It’s the ultimate Keynesian fantasy.

And it’s insane by any form of normal logic and sound economic thinking.

So what are we getting from the massive “stimulus” plans? A few things that needed to be done anyway, but also a lot of projects that simply poured money down the drain and produced no jobs. Even for projects that we read about that are claimed to be effective — such as federal highway projects — we’re finding out that states didn’t generally do projects they weren’t going to do anyway. For the most part, they simply shifted money they were going to spend to other programs that they didn’t want to cut.

The evidence is clear. Some decent things are done with “stimulus” money, but the good that’s seen is far less than the damage that goes unseen because of taking money away from taxpayers. It’s easy to point a finger to a highway and say that it was built with “stimulus” money. It’s impossible to point to all of the things that didn’t get built and that didn’t get created because the state extorted the money from its rightful owners.

Don’t believe the lie that state spending “stimulates” the economy. There’s absolutely no credible evidence of that — once you take into account the damage it does to the free market.