POLITICIANS left and right are jumping on the "stimulus" bandwagon, and several commentators have recalled Richard Nixon's famous 1971 remark, "We're all Keynesians now." The famed British economist John Maynard Keynes died in 1946, so what he would have thought of Nixon's economics must forever remain a mystery. But if "Keynesian" is shorthand for believing that governments can boost employment and keep the economy humming by stimulating demand through higher spending, then the political landscape today is indeed awash with latter-day Keynesians.
Which makes this a good time to recall an observation associated with another famed economist, the late Nobel laureate Milton Friedman: "There ain't no such thing as a free lunch."
With the economy weakening, home and stock values sinking, and recession fears growing, pols of every stripe have been hustling to put a "stimulus" plan on the table. The Bush administration is calling for temporary tax relief worth about $140 billion, reportedly in the form of tax-rebate checks of up to $800 per taxpayer. Several of the candidates vying to succeed George Bush are weighing in with plans of their own. Barack Obama, for example, wants to send $250 checks to low- and middle-income earners and to seniors on Social Security, followed by a second round of $250 checks if the first doesn't do the trick. Hillary Clinton proposes to spend $40 billion on rebate checks and another $70 billion on new housing, energy, and unemployment benefits.
The idea behind these plans is to get money into the hands of consumers who will spend it quickly, thereby revving up demand and "stimulating" the economy back to good health. There's just one problem: There ain't no such thing as a free lunch.
Sure, if you get an $800 kiss in the mail from Uncle Sam, you're likely to spend it on something - kitchen cabinets from
But where did that $800 come from in the first place? Does the federal government have a warehouse full of surplus money it can spread around when recession clouds appear on the horizon? Of course not. Washington already spends more money than it has; just three months into the new fiscal year, the budget deficit is up to $107 billion. And since no one is proposing to pay for a stimulus package by curtailing other spending, the only way Uncle Sam is going to come up with your $800 is to borrow it.
In other words, before any money can be injected into the economy by means of rebate checks or other benefits, it must first be extracted from the economy by means of borrowing (or taxation). The $800 you spend at Home Depot or SeaWorld is $800 not available to the bond buyer who lent Uncle Sam the money for your rebate check. Washington cannot jump-start the US economy by taking money from Jane and giving it to Joan any more than I can boost my own prosperity by withdrawing money from a downtown ATM and depositing it in an uptown ATM. There's no free lunch.
One talking point most of the would-be stimulators seem to agree on is that any plan to goose the economy must be short-lived. It "must be temporary and take effect right away," Bush said on Friday. House Speaker Nancy Pelosi likewise called for "a solution that is timely, targeted, and temporary."
But if Washington really has the power to restore vim and verve to the nation's economy by simply moving money around, why not do so all the time? Why should there ever be an economic slowdown if government spending can prevent it?
Here's why: Because the business cycle hasn't been repealed. Because booms are still followed by busts. Because politicians and policymakers cannot make a $14 trillion economy jump through hoops, particularly not by going even more deeply into debt.
The engine of economic growth is creating new wealth, not redistributing existing wealth. Rebating some of last year's taxes or expanding welfare-like benefits won't encourage anyone to be more productive. Permanently lowering tax rates - letting Americans keep more of the money they earn - will.
True, tax cuts instead of tax rebates would mean no kiss in the mail. Most politicians would rather treat you to a free lunch than stimulate you to work, invest, and take more risks. Just remember one thing about that free lunch: There ain't no such thing.
Jeff Jacoby's e-mail address is [email protected].