It Stimulates the Economy, Stupid

Barack Obama:

Two million people across the country would lose their unemployment benefits at the end of this month if we did not move forward on this tax agreement, and economists say that not only is that good for those families, it’s good for the entire economy. It’s probably the biggest boost that we can give an economy because those folks are most likely to spend the money with businesses, and that gives them customers.

(Via Fox Nation)

To be completely accurate, Keynesian economists are saying that. A classical economist would never say that, and here’s why:

Let’s follow the money. Let’s say you have ninety-nine dollars in your pocket (which you earned from wages at your job). You have a hankering for that new HP TouchPad because it blows the iPad away and—look! It’s just been discontinued and is on sale for $99! So, you spend that money and it goes to your electronics retailer (and some goes to HP).¹ Your electronic retailer gets a cut, as does their employee. HP also gets a cut, and the employee who made the TouchPad.

At some point the business owner is going to spend his cut, the employees theirs, and HP will even spend theirs. The cycle starts over.

So, in just one cycle of that money (buyer to seller), it’s resulted in productivity from you (you earned the money before you received it as a wage) and productivity from the the business owner, HP, and their respective employees. This is why classical economics works. You get more than one dollar of productivity each time a dollar changes hands. This results in economic growth.

Now, lets look at the unemployment argument above. Those people do receive money, but not in exchange for being productive. They receive money for doing nothing (that’s not a political statement, that’s a statement of fact).

It’s a lot like this. Let’s say a baker has his window broken. A Keynesian economist would argue this stimulates the economy, because the store owner buys a new window and stimulates the window factory, who has to employ a glass maker. But does it really? It’s true that it gives the window factory business, but that’s about the extent of it.

Look at all the other effects of this. The baker has to spend money on the window that he otherwise wouldn’t. This affects his net profit negatively. The baker must charge more for his goods to cover this expense, which results in other people experiencing a higher cost of living. Additionally, the baker would have eventually spent that money on something that generated a return. Perhaps an advertisement that would increase sales.²

You see, destruction doesn’t result in economic growth, because the baker just spent money to return himself to where he was before. The opportunity cost is that he would have spent the money to advance his economic position. He could have just simply bought a new pair of boots with that money, and he would have had a window and a new pair of boots. Instead he just has a window, which he had before, and he has less money. It’s actually a net loss!³

Taxation is just a form of wealth destruction, and while it’s true that people receiving unemployment spend that money, it doesn’t grow the economy. It’s just like the example above. When the unemployed spend their money, they are just returning businesses to where they were before—before the money was taxed away. Instead of keeping their money and growing their business with it, they are taxed and then receive it back in the form of a sale, but they’ve spent a ton of money to get that taxed money back. They’ve paid employees, bought materials, etc. Every dollar the unemployed spend is actually a net loss!

This doesn’t even take into account the incredible inefficiency present in government. Every dollar that’s taxed away from a business (for the purpose of unemployment payouts) isn’t available to be regained. There are people who have to administrate the unemployment insurance system, they have to be paid, etc.

So, next time someone tries to tell you that any form of government spending stimulates the economy, you can just point to the amount of economic growth that’s occurred during Obama’s record spending, and then send them this article.