Edwards flunks econ
Daily Journal for January 6, 2003
By JOHN HOOD
RALEIGH - Here we go again: another North Carolina Democrat, running for yet another office, and repeating the same discredited Keynesian nonsense about stimulating the economy.
Sen. John Edwards is running for president, and I wrote last week for National Review that his candidacy should be taken seriously. Okay, let's do that. He unloaded yesterday on ABC's "This Week" program on President Bush's impending proposal for tax cuts, making the same old foolish argument that Erskine Bowles made last year about how lowering taxes on rich people doesn't stimulate the economy because they will save rather than spend it.
John Maynard Keynes made this argument back in the 1930s, in one of the sillier passages in his famous General Theory. Since, he contended, recessions are caused by too little "aggregate demand," governments should use fiscal policy to get people (or governments directly, through deficit spending) to spend more cash, thus boosting demand high enough to justify hiring more workers to supply that demand. The assumption, you see, is that there is some optimum level of consumption that would serve to maximize employment and growth, even if consumers don't realize it. But to get there, according to Keynesians, you have to try to target your intervention to poor and middle-class people, who are willing to waste any money you give them on items they didn't previously think they needed. Rich people, those miscreants, might just take the cash and save it, which would subvert the goal of the government policy.
This is asinine. This is the kind of mumbo-jumbo that gives economics a bad name. Rational people don't go around hoping their fellow citizens will super-size their fries or buy extra-hold hair spray or rent Emilio Estevez movies instead of investing their money in a biotechnology company that might, one day, cure cancer. But that is precisely what the Keynesians, and now our own Sen. John Edwards, advocate in the name of boosting the economy. In their minds, our economy is suffering from too little consumption. And it's the government's job to correct the error.
Actually, there is no such thing as "too little" consumption, or "too much" for that matter. Such value judgments would require politicians to have some magical means of determining the right amount of consumption, from which reality diverges enough for the politicians to "fix" things. Unless you can read minds or travel through time, this is impossible.
Spending their own dollars, households buy precisely that which they most value among a range of options. If they don't spend all their dollars on current consumption, and instead sock some of it away in the bank or a mutual fund, that means they value what they can buy in the future with that money - say, a car or house, or vacations in their retirement - more than they do extra fries or personal grooming products or that St. Elmo's Fire rental today. Yes, if you hand them some extra cash, some may buy these items on impulse. But if they don't, if those evil rich people save instead of splurge, they are still "doing their part" to boost the economy by putting the money to work on investment projects, ranging from capital construction to high-tech research, that create demand for labor and resources and that will result in higher-value consumption in the future.
It's a shame that Edwards is making the same tired argument that all the other more experienced Democrats are making. He could be distinguishing himself from the rest of the pack by advocating not 1930s-era Keynesian economics but at least 1960s-era Kennedy economics - the kind that focuses on creating incentives for investors and entrepreneurs to create a larger and more productive economy - if not 1980s-era Reagan economics, which actually had a fair amount of Democratic support in Congress.
Senator, in case you didn't realize it, "regular" people save money, too. It's a good thing. If we cut their taxes, and they saved more money, that would expand the pool of loanable funds and induce more investment spending in the economy. Instead, you are just singing the same old class-warfare tune. Warble away, as your audition isn't likely to last long.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.