No free stimulus
Nobel economist Paul Krugman is one of many pundits who insist that some normal laws of economics don't apply when unemployment is high.
One economic law that Krugman claims to be inapplicable when unemployment is high is the law of opportunity costs. Krugman insists that high unemployment means output can be expanded at zero cost by increased government spending. In normal times — when unemployment is low — increased government spending on guns for the military requires that resources be diverted away from the production of butter for households. But, says Krugman, the necessity to make this and other such tradeoffs disappears when unemployment is high. Krugman's claim is that unemployment makes some resources no longer scarce — and, therefore, that unemployment makes outputs produced with these resources free.
There's no doubt that when unemployment is high, the economy produces fewer goods and services than it would produce if unemployment were low. This doesn't mean, however, that the unemployed resources are superabundant. Nor does this fact mean that output can be expanded as easily as Krugman suggests.
We must ask why large numbers of resources — human labor, capital goods and raw materials — remain unemployed. In Krugman's Keynesian telling, the reason is miscoordination between would-be buyers and would-be sellers. Sellers want to produce and sell more and the owners of all those unemployed resources want to put their resources to productive use, while buyers want to buy more.
But sellers are afraid to produce more because they're unsure that buyers will buy more, while buyers can't reveal their willingness to buy more because too many of them, being unemployed, don't have the income to spend.
If this miscoordination were in fact the only or the chief cause of unemployment, then Krugman's Keynesian account would be satisfactory. But that account unjustifiably assumes that inadequate spending is the cause of the problem rather than a symptom of a deeper problem.
If investors aren't investing “enough” and consumers aren't spending “enough,” perhaps people fear that something far worse is wrong with the economy than merely people's unwillingness to spend. Perhaps government policy so threatens the security of property rights that people choose to hoard money as a safeguard against the likelihood of an economically difficult future.
If people are hoarding money for this reason, then those hoards are not idle resources. Those hoards serve as protection against the perceived prospect of bad economic times ahead.
Of course, it's possible that people doing the hoarding are mistaken that government's regulatory and tax policies are on course to suffocate economic activity. But it's more likely that Keynesians such as Krugman are mistaken to assume that all will be well if only people — with government taking the lead — simply start spending more.
If our economic doldrums are caused by enterprise-killing government policies — what economist Robert Higgs calls “regime uncertainty” — then no amount of Federal Reserve “loosening” or government spending will solve the problem. And resources diverted by “stimulus” programs into infrastructure projects or “green-energy initiatives” will not be free. There will be fewer resources kept in reserve as valuable safeguards against destructive policies — and the decrease in size of these safeguards is a real cost.
Donald J. Boudreaux is a professor of economics at George Mason University in Fairfax, Va. His column appears twice monthly.