In 1946, Henry Hazlitt wrote in his book “Economics in One Lesson” that “There is no more persistent and influential faith in the world today than the faith in government spending.” The general faith in the federal government’s ability to stimulate the economy has persisted unabated over time, and it might be a good time to review the insights of Hazlitt from more than 60 years ago:
Everywhere government spending is presented as a panacea for all our economic ills. An enormous literature is based on this fallacy, and, as so often happens with doctrines of this sort, it has become part of an intricate network of fallacies that mutually support each other. Here we examine the mother fallacy that has given birth to this progeny, the main stem of the network.
Everything we get must in some way be paid for and all government expenditures must eventually be paid out of the proceeds of taxation. Every dollar of government spending must be raised through a dollar of taxation either immediately or ultimately. Once we look at the matter in this way, the supposed miracles of government spending will appear in another light.
A bridge is built by the government primarily “to provide employment.” Two arguments are put forward for the bridge, one of which is heard before it is built, the other of which is heard after it has been completed. The first argument is that the construction of the bridge will provide employment. It will provide, say, 500 jobs for a year. The implication is that these are jobs that would not otherwise have come into existence.
This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $1,000,000. They will have that much taken away from them which they would otherwise have spent on the things they needed most.
Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, radio technicians, clothing workers, farmers.
We can see the bridge. But if we have taught ourselves to look for indirect as well as direct consequences we can once more see in the eye of imagination the possibilities that have never been allowed to come into existence. We can see the unbuilt homes, the unmade cars and radios, the unmade dresses and coats, perhaps the unsold and ungrown foodstuffs. To see these uncreated things requires a kind of imagination that not many people have. We can think of these nonexistent objects once, perhaps, but we cannot keep them before our minds as we can the bridge that we pass every working day. What has happened is merely that one thing has been created instead of others.
MP: It’s a simple, but frequently overlooked and irrefutable fact that the only way the federal government can “stimulate” (benefit) one group is to “de-stimulate” (tax) another group. As Walter E. Williams explained in his syndicated newspaper column this week, “The fact that Congress has no resources of its very own forces us to recognize that the only way Congress can give one American one dollar is to first — through intimidation, threats and coercion — confiscate that dollar from some other American through the tax code.” Seen in that light along with Hazlitt’s analysis above, it should be obvious that government stimulus can never really effectively create a net increase in jobs, income or wealth, but can at most only re-distribute and re-allocate jobs, income and wealth through confiscation of private resources. And in most cases, the government’s forcible redistribution will make us worse off because of government inefficiency and inability to re-direct private resources to their highest and best use. But don’t expect the public’s and politicians’ faith in the fallacy of government stimulus to wane, it’s a fallacy and fantasy of “getting something for nothing” that is just too appealing.