Presidential Hubris

Free Enterprise Zone, The Freeman, Sheldon Richman

If we were going to spend $700 billion, it seems it would be wiser having that $700 billion going to folks who would spend that money right away.

Barack Obama said those words in defense of his opposition to extending the soon-to-expire 2001 and 2003 tax-rate reductions to people making more than $200,000 a year. The government guesses that not extending them – that is, raising taxes — would bring in $700 billion over a decade.

Hard as I try, I can’t let this pass. As I’ve said recently, one need not feel all warm and fuzzy about the rich in a corporatist economy riddled with privilege to be bothered deeply by what Obama says.

Look at the statement closely. Now, if I may adapt what Mary McCarthy said about Lillian Hellman, every word Obama said is a fallacy, including “to” and “that.”

Let’s break it down.

If we were going to spend $700 billion… The “we” isn’t you and I. It’s him and his army of presumptuous bureaucrats. There is no collective decision being made by the nation. A group of identifiable individuals, ultimately backed by armed personnel, will decide how those resources will be used. How did they get those resources?

Imagine a mugger eyeing a potential victim, thinking, “I could spend that guy’s money by leaving it in his pocket, or I could spend it myself right away. Now which would be the better way to spend it?”

Any reasonable person sees what’s wrong. But change the context to government and politics, and all the rules are thought to change. Why is that? Because the government represents us? But it doesn’t really. (And if it did, how would that justify force?) The people who run the government say it represents us, but they don’t know what they’re saying. True, if enough people don’t like how the officials spend money, they may be voted out of office. But that doesn’t change the fact that while they are in office, they represent only themselves and patrons. No one can fire them on the spot for misfeasance or malfeasance or even order them to stop, and they have myriad ways to disguise what they do. The principal-agent model breaks down. It is more designed to blunt criticism and immunize offenders. (I’ll save “tacit consent” for another occasion.)

The Wisdom of Power

…it seems it would be wiser having that $700 billion going to folks… Does it now? On what grounds are we to conclude that Barack Obama — or anyone else in political office — is qualified to say what a wiser use of such a sum of money would be? It’s hard enough deciding what’s a wise use of one’s own meager resources: The future is uncertain and the choices are many. It is the height of hubris – a pretense of knowledge, to use Hayek’s phrase – to invoke wisdom while asserting the power to dispose of that money.

who would spend that money right away. There you go. He has a good reason after all. He’s says the money will go to people who will spend it in a hurry. Of course, he doesn’t actually know that. The money would just be distributed across the budget, funding the same old boondoggles or starting some new ones. Part of that $700 billion would surely go to military contractors to make something irrelevant to Americans’ welfare and inimical to the welfare of some non-Americans. We don’t know how quickly the recipients would spend the money. The wealthy executives of the contracting companies may be the same people who would have held on to the money if the tax-rate reductions were extended. A lot of it will go to government employees, who have higher wages than people in the private sector. This is one of those talking points that sounds as though it makes sense — until you … think about it.

But let’s assume the people who get the money would spend it right away. Why is that better than simply letting the people who make the money keep it? The theory is that people making over $200,000 a year don’t spend enough of their incomes to stimulate the economy. So it’s Keynesianism that Obama is espousing here. Take the money from people who will sit on it and stimulate the economy by spending it in ways – public works, for example — that will put it into the pockets of people who will go out and buy things. The shopkeepers who get it next will then spend it, and on and on. If you watch Chris Matthews, you’ll get as sophisticated a rendition of this theory as possible: The economy’s in a ditch. Consumer spending would get it out, but consumers are afraid to spend, so the government must spend for them. (The leading Progressive Keynesian, Paul Krugman, and the leading conservative Keynesian, Martin Feldstein, think it will take a major war to produce a big-enough stimulus. See my comment.)

Keynesian Fallacies

But Keynesianism gets it wrong on so many counts. The perceived need for stimulus is not simply that aggregate demand is too low. Individuals are doing things – and not doing things – for particular reasons in response what’s going on around them. Consumers aren’t spending because they’ve lost their jobs or fear they may do so. People are losing their jobs because a government-produced inflationary boom went bust and malinvestments need to be liquidated so resources can be realigned with consumer demand. But that’s not happening (fast enough) because unpredictability about what the government may do next and other factors make entrepreneurs and investors cautious.

All that Keynesians see are consumers not spending. They are uninterested in why. Once the reasons are seen, the remedy becomes clear. The burdens of government must be lifted quickly and people must be confident they will stay lifted. Then the necessary adjustments will be made — in part because people save (rather than consume) and invest, precisely what Obama seems worried about.

So let’s not raise tax rates – let’s cut or repeal taxes (and spending)! Obama’s “fears” are ungrounded. But give him credit: He combines bad economics and a shameful moral philosophy rather adeptly.

Sheldon Richman is the editor of The Freeman and, and a contributor to The Concise Encyclopedia of Economics. He is the author of Tethered Citizen.Copyright © 2010 Foundation for Economic Education. Used with permission.

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