WASHINGTON, Oct. 24, 2015 – Hurricane Patricia fizzled quickly into a tropical storm when it made landfall in Mexico on Friday, but it will continue to dump huge amounts of rain as far north as Texas. There are no clear reports yet on human casualties, but new Canadian Prime Minister Justin Trudeau and America’s Democrats must have their fingers crossed that the property damage will be enormous.
This isn’t to suggest that they’re monsters, but that their thinking on economics often verges on magical. That is to say, they think like Keynesians.
Trudeau proposes to take Canada out of its economic funk by running larger budget deficits. If the government puts more money in the hands of the poor and working classes, they’ll spend more, thus encouraging businesses to hire more people to produce and sell more. Those new employees, in turn, will spend their wages on goods and services, creating new and better unemployment opportunities for the remaining unemployed. Thus Canada will enter a virtuous cycle of expanding consumption, wealth and rising wages.
Bernie Sanders and Hillary Clinton hope to achieve something similar in the United States, as probably do the minor contenders for the Democratic nomination, though no one can remember their names, let alone their policy positions. Clinton sees this in terms of building on the Obama legacy, which is not all that it should be due to too niggardly a stimulus at the start of his administration and too much centrism.
Liberal true believers consider Obama a pre-GOP-radicalism Republican, a man who would have been very much at home in a Rockefeller, Eisenhower or even Nixon administration. (Perhaps too much at home with Nixon, not that liberals mind enemies lists, the destruction of minor nations by proxy and without congressional approval and using the IRS as a political weapon anymore.) They want a Keynesian who really feels the magic.
The impetus to raise minimum wages to $12 or $15 is based on the same magical thinking. If McDonald’s raises wages to $15/hour, its workers will be able to buy more stuff at Walmart, which by selling more stuff will stimulate more production and be better able to pay its workers a higher wage so that they can buy more stuff. Again we get a virtuous cycle of growth and prosperity.
God said, “Let there be light,” and there was light. Who knew that wealth could also be created ex nihilo?
The logic is seductive. If I pay you more, you can buy the stuff I hire you to make, so I can hire someone else to help make it at a wage that lets him buy my product, and so it goes for ever. All that we need to make us rich is to get people to spend more money.
Enter Hurricane Patricia. But let’s simplify the scenario. If you want to make your community richer, go downtown and throw a brick through a restaurant window.
According to Frederic Bastiat’s popular fable, if you break that window, the restaurant owner will have to pay a glazier a thousand dollars to replace it. The glazier, enriched by that money, might hire another employee, expecting perhaps a rash of broken windows. Or she might take her husband out to dinner at the restaurant, perhaps buying him a new suit so that he’ll be presentable. The tailor, after selling the suit, might take his wife to dinner and buy her a new pair of shoes.
And on it goes, that broken window generating a wave of prosperity that expands ever outward, and with the people successively enriched all enjoying dinner out at the restaurant, whose owner is thus not harmed by the broken window.
With thinking like this, it’s odd that economics was ever called the “dismal science.” You’d as well call Hogwart’s the “dismal academy” and unicorns the “dismal ponies.” Whatever magic is, it isn’t dismal.
The flaw in this thinking is obvious. Money isn’t wealth. It never was. The window is wealth, the suit is wealth, the shoes are wealth. The things that money can buy are wealth. When you throw the brick through the window, you destroy wealth, you don’t create it.
The restaurant owner had a thousand dollars and a window; after your efforts and the glazier’s, he was left with just a window. The glazier got the thousand dollars. The restaurant owner could have bought the suit himself. Now the glazier’s husband has it.
Sanders and Trudeau propose to create wealth by fiat. Money can indeed be created by fiat. The money in your bank account, after all, doesn’t really exist except as a pattern of ones and zeros in a computer’s memory. But that isn’t wealth.
A house is wealth, and so is a car. Perhaps God can create a car by nothing but an act of will out of nothing more substantial than thought, but Bernie Sanders looks only as old as God, not as powerful. Hillary Clinton may be untouchable by the laws of man, but the laws of the universe are indifferent to her brand of Teflon.
The fire bombings of World War II didn’t turn Japan and Germany into economic superpowers, nor will Hurricane Patricia do anything good for Mexico. Yet magical thinking persists. Fantasy is more pleasant than reality, but the economy will grow and employment will expand only through the real efforts of people working with real resources to produce real goods and useful services that people really want. Throwing bales of government money out of helicopters won’t do it, nor will hiking the minimum wage, nor will Keynesian incantations.
It is, however, a lovely dream.