Executive Summary

Facing an economic downturn and an
election, politicians of both parties seek to stimulate consumer
demand— and some business investment—through political action. If the
early 2008 “Stimulus Package” does not succeed, they promise there will
be “more to come.”

As in recent stimulus campaigns—for
example, during the first terms of presidents Bill Clinton and George
W. Bush—politicians almost uniformly accept the legitimacy of
government stimulus and rarely ponder the future economic harm such
intervention may cause.

Genuine stimulus would entail
liberalization of the economy from excessive regulations,
interventions, and spending, and from political inflation of the money
supply. It would maintain the conditions—legal order, minimal
regulations, and stable institutions—within which wealth can be created
while recognizing that governments do not themselves create wealth.

“Say’s Law” in economics holds that
supply creates its own demand. A relative overproduction of certain
goods may occur, implying that too many scarce inputs have gone into
the production of unwanted items relative to inputs for desired goods.
But general overproduction—to which demand stimulus would allegedly
provide relief—is not the core economic problem.

Among the prerequisites for economic
well being—along with negligible political interference—is low
tolerance for special-interest pleadings for resource transfers, no
political maintenance of wages or prices above market levels, and a
rejection of government-granted monopolies. Indeed, there is a tendency
for recession if government does not perform these classical functions
of preventing the interest group manipulation that distorts smooth
economic enterprise.

Unfortunately in today’s world, the
opposite of Say’s Law—“demand creates supply”—dominates macroeconomics
and politics generally. Political expediency induces policy makers to
overlook the long run, and to support measures like short-term demand
stimulus packages. Such artificial demand distorts the freely
determined distribution between consumer and producer goods. Political
stimulus sends resources in the wrong direction and the true adjustment
that the market actually needs is further postponed.

It may very well be that, while
downturns and recessions can be effectively addressed through
voluntary, market means—as Say’s Law implies and its noninterventionist
adherents maintain—our current political framework does not allow for
non-governmental resolution as an option. We rarely open the newspaper
to read the headline, “Government Decides to Do Nothing about Economic
Downturn.” Policy prescriptions like the 2008 election-year stimulus
package may foster political ends that have little to do with actual
economic recovery.

A real test of Say’s Law will require
changes in what most people expect from government, and in what
representatives in government are able— constitutionally—to do in the
name of public service. Once it moves beyond performing its “classical”
functions of maintaining order and thwarting contrived scarcity,
government becomes a transfer mechanism, one inherently limited in what
it can contribute to the real economy. It can add little, and subtract
much.

One immediate form of “stimulus” is to
cut marginal tax rates to facilitate economic activity via increased
supply. With returns to enterprise increased and workers and investors
certain that present efforts will be penalized less, the economy will
begin expanding owing to reduced effective tariffs on the creation of
supply. Similarly, a sustained program of reducing governmental
regulatory interventions in the economy, and invigorating institutions
to keep such interventions minimal, point the way toward prosperity and
wealth creation, and to an economy that can finally eschew damaging
appeals to political stimulus.

Related Files: 6425.pdf