Henry Hazlitt long ago observed that “economics” is stalked by fallacy. That’s no doubt true, which is why it’s easy to nod along to Washington Post columnist Megan McArdle’s assertion that “Both parties’ pet economic theories are kaput.” She speaks the truth. To watch MSNBC or Fox is to frequently witness economic confusion.
At the same time, it’s not just the Parties that are mistaken. While McArdle is an entertaining writer, she would similarly profit from putting some theories to rest that seemingly won’t die.
In her recent column critiquing Democrats and Republicans, McArdle writes of “upward pressure on prices,” and that “much of that pressure is because of Biden’s fiscal policies, which have seen the president approve more than $4 trillion in new borrowing during just 20 months in office.” About the government spending, it should be made clear up front that it is a hideous tax; arguably the biggest tax of all on freedom and economic progress. While Jeff Bezos, Mark Zuckerberg and Fred Smith would theoretically work at much higher income tax rates given their passion to create, none of the three could or can overcome a lack of capital. Government spending is the ugly, progress-arresting process whereby Nancy Pelosi, Mitch McConnell and Joe Biden stand athwart market-driven capital allocation in favor of their own.
Of course, the problem with McArdle’s analysis is that it doesn’t critique what matters (the spending) as much as it attacks what the columnist imagines is the result of the spending: inflation. McArdle believes government spending instigates higher prices, except that it does no such thing. Government isn’t some other despite what economists, politicians, and brain-dead Keynesians (a redundancy?) would have you believe. Government can only spend $40 or $4 trillion insofar as it relieves the productive of it first. All demand springs from supply, which means that $4 trillion in “new demand” care of wasteful politicians results from the productive enjoying $4 trillion less. If we ignore that demand isn’t the cause of inflation as is, what McArdle feels is the source of new demand quite simply isn’t. The Keynesian multiplier is a myth.
McArdle then writes that she “supported deficit-financed relief during both the Great Recession and the covid-19 pandemic,” and she did given her supposition that “Rapid economic contractions can feed on themselves, as panicked consumers hoard money against possible financial hardship and thereby trigger further waves of layoffs and business failures.” Here McArdle ignores the simple truth that no act of saving (short of stuffing one’s money under a mattress) ever subtracts from demand. What we save is automatically directed in market-driven fashion toward those who need it. Financial intermediaries don’t "rent" our money in order to sit on it. Doing so would bring on rapid insolvency. All of which explains why “recessions” are self-correcting if governments get out of the way. Precisely because people shrink their consumption, the capital base without which businesses can’t form, expand, or create jobs grows. The notion that savings come at the expense of economic growth or recovery is a dangerous one, and it’s something that demands routine correction. So is the belief that economic growth causes inflation. Unfortunately, McArdle promotes that pet theory too.
While promoting the falsehood that government spending can “cure the economic patient,” she adds to what’s false with the assertion that the latter is only true “if there’s spare economic capacity waiting to be put back into service as soon as demand recovers.” Oh dear. We now need government to mobilize dormant resources? From there, the only closed economy is the world economy. Everything we Americans produce and consume is a consequence of wildly sophisticated global cooperation. In other words, if there’s a lack of “spare economic capacity” in the U.S., it’s made up for by labor and capacity around the world.
Unfortunately, McArdle needs the mythical Phillips Curve to throw shade on Republicans “never able to move beyond that tax-cut-and-deregulation agenda that had proved so popular in the 1980s.” Oh yes, how low rent to promote reduced penalties placed on work in concert with reduced oversight from the very individuals who would never rate actual jobs in the sectors they obnoxiously presume to “regulate.” Without defending Republicans who frequently don’t understand why they’re for tax cuts or deregulation, it can’t be stressed enough that there’s never a bad time to be reducing the tax and regulation burden. Thought of another way, the reasonable would be for tax cuts and deregulation even if it could be proven that neither stimulate growth or excite voters.
Rather than embrace freedom, McArdle bemoans a failure of GOP types to foist their ineptitude on “immigration and health care,” all the while offering up an obnoxious non sequitur about deregulation as the source of a “punishing financial crisis.” Oh yes, the 50+ full-time federal regulators at 5-time bailout recipient Citi seemingly weren’t enough to stave off errors, nor is it apparent to McArdle that the regulators she cheers were the ones cheering on the mistakes that brought banks to their knees in the first place.
Oh well, books could be written. No doubt it’s true that Democrats and Republicans would be wise to move on from pet theories. At the same time, it’s useful to remember that more than a few get their “pet theories” from commentators in prominent publications.