Steven Horwitz
In the spirit of Don Boudreaux, here's a letter to the editor I just sent off to the Watertown Daily Times in response to a letter arguing that the problem facing recovery is insufficient consumer demand, thus more stimulus is needed.
February 5, 2013
Letters from the People
Watertown Daily Times
260 Washington Street
Watertown NY 13601
Charles Rawlins’s letter of February 5 is full of so many economic fallacies that it’s hard to know where to begin. Rawlins argues that getting the economy going again requires stimulating consumer demand because that will lead businesses to invest and create jobs. What is conspicuously absent from his letter is any actual data. The data do not support his argument in the least.
Real personal consumption expenditures peaked in late 2007 before the recession and by late 2010 had already recovered to that peak. Consumption today is well ahead of that peak and up substantially from its weakest point in mid-2009. The economy is not suffering from lack of consumer spending, putting a substantial dent in Rawlins’s case for more government spending on consumer stimulus.
The problem instead is private investment spending. One of the first things economists teach about business cycles is that the most variable part of spending is not consumption but the investment that firms make in capital. Private investment spending has only recovered about half of its losses from the recession. Firms are simply not willing to invest in the equipment and research and development to make new products and create new jobs. That is the problem to be solved.
In fact, consumers cannot spend what they haven’t earned, and government cannot spend what it hasn’t taken from producers through taxes, borrowing, or inflation. Rawlins falls for one of the oldest fallacies in economics and one that has to be pointed out every generation. Demand does not create wealth, the production of wealth creates the ability to demand.
If we want to speed up this anemic recovery, we need to stop paralyzing businesses with the uncertainty that comes from a federal government that can’t get its own fiscal house in order and that continues to pass programs and regulations that shackle the productive power of the private sector. When firms don’t know what government is going to do next, and what government does do is to raise their costs and then vilify businesspeople for trying to respond by adjusting how they produce their goods and services, we should not be surprised that businesses are unwilling to invest in the future and create new jobs in the process.
It’s not insufficient consumer demand that’s blocking recovery, it’s a rhetorical and regulatory environment that is hostile to the very source of new products and jobs: private investment.
Sincerely,Steven Horwitz
Charles A. Dana Professor of Economics
St. Lawrence University
Canton NY 13617
Great letter. It took me 2000 words to say what you fit into a single, short letter. Bravo. John Stuart Mill would be proud.
Posted by: John Papola | February 05, 2013 at 09:18 PM
Sorry, butI prefer Boudreaux's impression of Bastiat mimicking Say
Posted by: 1ArmdEconomist | February 06, 2013 at 12:07 AM
I'd like to see a graph juxtaposing consumer spending trends and private investment trends over the last 10 years or so. People love graphs!
Maybe I'll make that my own personal project.
Posted by: Rev. Pfloyd | February 11, 2013 at 07:58 AM
Pfloyd: http://blog.independent.org/2011/09/23/the-stagnant-u-s-economy-a-graphical-complement-to-higgs-contributions/
Posted by: Steve Horwitz | February 11, 2013 at 09:34 AM
Well done! I say it's time we all became a bit more rhetorically pugilistic. I've become decidedly more challenging to people when they say silly economic things anymore, or talk about "banksters", having sold to many banks and other capital markets players and never seeing any horns coming out of their heads.
We have to be very tough minded though. There is a tendency among academics to play the 'false balance' game in terms of being clear about what the arguments against a position one holds are, and how those arguments fare. The tone can become decidedly uninterested in a weird way, and while I admire objectivity, to me we are dealing with propaganda. We are dealing with nothing short of Orwellian efforts to contort knowledge towards politically desired ends via the use of language by the left.
Just listen to Obama. He's constantly quoting a 'broad range of experts' or a 'vast majority' or a 'consensus', and using other academic sounding formulations to gussy up his policy recommendations. His standard of truth seems to be rhetorical plausibility versus any connection to an occurring reality. He also has lots of pseudo-science to back him up, and he uses it with abandon, engaging in an orgiastic frenzy of his brand of "scientism", as Hayek called it. We need to show up those arguments.
We have to punch through the noise. I was hanging out with a retired principal from an Atlanta high school recently. She's black and female (our families are intermarried) and we were talking about Obama. I told her that my objections were purely about economics. When I explained, she simply didn't understand.
I asked her if she minded playing along with me, answering a couple of questions. The first one was: 1. What is money? She couldn't answer completely, but did better than most saying "you use it to buy things" - means of exchange, but missed store of value and unit of account. I then asked her: 2. How is wealth created? She could not answer at all. She knew nothing theoretically about he superiority of free exchanges and specialization etc.
I do this rather frequently now with my smart, and open Progressive friends. I find it really slows their roll a bit. When confronted with the fact that can't even explain the basics of our economy, a bit of humility usually arises quite naturally, at least for the moment. I'm not saying it's always appropriate, but from time to time it's a nice trick.
Posted by: glennd1 | February 11, 2013 at 06:55 PM