My Fifth Grade Economic Stimulus Plan
The year was 1977 and the unemployment rate had been over 7% for two years. I started fifth grade that year and came up with an economic stimulus plan to create jobs. It was to install toll roads all across America. This would provide jobs to the toll collectors and would pay for itself through the tolls collected. More new jobs would be created when these newly hired toll workers spent their paychecks in the economy. This plan tells you two things: 1) I was a Keynesian when it came to economics, and 2) I was not a normal fifth grade kid.
Looking back at my fifth grade plan today, I must admit it was silly. While jobs would have been created, they would have had absolutely no economic value. No one has value for stopping at a toll booth to pay a toll. In fact, it would have had a negative economic value as it would have made driving less efficient. On a macroeconomic scale, the money and resources consumed by toll booth workers represents a drag on the rest of the economy. While it was a stupid plan, please give me a break - I was only a fifth grader.
My fifth grade economic stimulus concept suffered from the same problem that most government driven stimulus programs have. They destroy wealth to create economic activity because they focus on that which is seen rather than that which is unseen. In the case of toll booths, the money spent by drivers paying tolls cannot also be spent on other items like a cup of coffee or eating out, or of greatest economic importance, can't be saved so that it can be loaned out to an entrepreneur. We see the government job running a toll booth, but miss seeing the jobs lost at the restaurant that goes out of business, or the service station that fails because of lack of coffee sales, or the business that never forms at all thanks to always limited capital being consumed thanks to the heavy hand of government.
This concept was first raised by French political economist Frederic Bastiat in "That Which is Seen, and That Which is Not Seen" (1850). In this essay, Bastiat gives the example of a shopkeeper's son who breaks a window. The shopkeeper must pay 6 francs for a new pane of glass from the glazier who in turn has money to spend on something else. Many people would consider the child breaking the window to be an economic stimulus. Bastiat points out that without the broken window, the shopkeeper would have had money to spend on another item such as a new pair of shoes, or possibly expansion of his business into a newly productive area.
It would also be easy to imagine a shoemaker in 1850 working in a shop without a glass window. The sale of the extra pair of shoes would give him the money to purchase a pane of glass for his shop. In this example, there is more economic activity in the unseen with the extra sale of a pair of shoes, and more wealth in the end with the shopkeeper owning a pair of shoes and the shoemaker owning a glass window.
The government track record for stimulus programs will typically resemble a child with a bag of rocks breaking windows. The Cash for Clunkers program destroyed working automobiles. Despite Nancy Pelosi declaring unemployment benefits "the most important stimuli for the economy," extended unemployment benefits tend to reduce wealth creation from the people receiving the "stimulus." Finally, the falsely presumed mother of all stimulus programs - war - literally breaks things that must be rebuilt.
Wealth transfer schemes also do nothing to create wealth. Transferring wealth from one part of the economy to another to stimulate growth is a lot like a man with a tourniquet who needs blood flow to his leg. A wealth transfer scheme is like the government taking blood from his arm to put in his leg. Fresh blood may reach his leg, but usually some blood is lost in the transfer and the benefit to the leg is very temporary. The correct response is to remove the tourniquet.
Economically, many government tourniquets exist which restrict the flow of money, capital, labor and resources. These include excessive regulation and taxation. In addition, government actions such as stopping the Keystone XL pipeline act as tourniquets on the economy. The proper response to an economic downturn is to loosen the tourniquet by increasing economic freedom.
My only question for those proposing an economic stimulus plan: Are you smarter than a fifth grader?
Post Script: To any lawmakers reading this article, my fifth grade stimulus plan is a cautionary tale, not a policy proposal.