Why Stimulus Does Not Stimulate
Congress is hard at work on a stimulus bill. Doubtless their efforts will pay off. Does anyone stop to ask what it is about stimulus that stimulates? And what, exactly, does it stimulate? Start by spending a lot of money that the government does not have, borrow the difference, and the central bank prints the difference and buys up the debt. But does that increase the production of useful things? To answer this, we look at an unlikely friend, Keynes and his General Theory.
The British Austrian school economist William Harold Hutt penned a devastating critique of the new economics, The Keynesian Episode: A Reassessment. In this book, Hutt explained why Keynes’s views were able to gain a foothold in the Britain of 1937. The economy was stuck in an intransigent slump of many years’ duration. The cause of the problem? Many workers were priced out of the labor market by unrealistically high wage demands. A welfare system that enabled them to remain unemployed contributed to the problem. The wages that were too high had been negotiated by labor unions using the threat of strike, and the full awareness that the government would look the other way when unions employed coercive measures. Other workers were forced into underemployment, doing something less remunerative or a job they cared for less.
Say’s law is the observation that each supply of a good to the market constitutes a demand for some noncompeting good. As workers add to supply, they add to demand. In reverse, when workers withdraw their services, they cease their contributions to supply and in so doing withdraw their ability to demand to the same degree. The withdrawal of demand made conditions worse in other industries not constrained by labor union contracts, and made the more marginal workers in those industries unnecessary (or at best able to work only at a lower wage).
The solution—according to Hutt—was that statesmen and economists should have told the public the truth. Naming and shaming the a
Article from LewRockwell