Friday, January 25, 2008

Economic Principles

During trying economic times, it is easy to forget the timeless truths—first instituted by God and later ratified by wise economic thinkers—production produces, consumption consumes, and the connection between them is iron-clad, there must be production for there to be consumption, and God is the primary producer.

COMMENTARY
Hillary and Say's Law
By GEORGE MELLOAN
January 23, 2008; Page A25


"But this stimulus shouldn't be paid for," Hillary Clinton said to Tim Russert in a recent interview, when he reminded her that she'd omitted a price tag somewhere.

Shouldn't be?

Say hello to that old ghost from the past we thought banished by Ronald Reagan in the 1980s. It's called "Keynesian Economics."

Ironically, even the brilliant John Maynard Keynes disowned it. After meeting with a group of Washington "Keynesians" in 1944, he said he was the only non-Keynesian in the room. His brainchild, government spending to stimulate demand, had been converted from its originally intended limited application to an all-purpose economic panacea by politicians, academics and journalists.

The fundamental principle of the Keynesians, one that Lord Keynes would have scoffed at, is that government can deliver something for nothing. To be sure, government does transfer income and wealth to favored constituencies, such as rice farmers or ethanol producers, from people who pay taxes. Washington calls that economic stimulus. The costless "stimulus" Sen. Clinton had in mind would be broader, although tilted toward low-income earners. The intent is to pump up consumer demand by showering "tax rebates" on people with a "greater propensity to spend."

But federal efforts to stimulate "demand" have had a dismal record. Herbert Hoover tried in the late 1920s to pump up farm prices and FDR in the 1930s with cartels. The Depression droned on and on. Pearl Harbor forced the U.S. to ramp up production of guns and planes and fight a war. But it was not "demand stimulation" that ended the Depression. It was the urgent need for production. Yet Jimmy Carter came back with the same old remedy in the 1970s when the economy was in the doldrums, mainly because of government spending and regulatory excesses. His $50 tax rebate was a pitiful failure, so he turned to -- what else? -- more government spending.

Some Democrats still think that government stimulation of demand is an antidote to a slowing economy. Yet economics has certain iron laws that the government violates at its peril. One of them has been called Say's Law, because it was first enunciated by the late 18th-century Frenchman Jean-Baptiste Say. He said "products are paid for with products." Or to rephrase the point, "a society can't consume if it doesn't produce." Hillary's assertion that her "stimulus" package shouldn't be paid for denies reality. Somebody has to pay for it. One man's consumption must be paid for by his own or someone else's production.

True, one man's consumption may exceed his production, for a wide variety of reasons that could include his use of credit, or his good luck inheriting a fortune created by a productive parent. Nation-states, too, can consume more than they produce through use of credit; but unless they attract compensating foreign investment, the difference will be adjusted by a decline in their national currency, as is currently the case with the U.S. dollar. The resulting price inflation will then cause a host of other problems, including erosion of the capital base. That is the real problem the U.S. economy faces, and it will not be addressed by throwing someone else's money out of airplanes to the waiting multitudes.