The multiplier is not prosperity

“I’m doing my part to help the economy!”

I’ve heard many folks make this joke after a big purchase. We snicker. We know they really bought it for the personal benefits they expect to gain. As we’ve been discussing in the comments, they bought it because they valued it more than what they gave up.

The joke implies the multiplier effect — the idea that your purchase stimulates economic activity. You buy a car, which means income for the car maker and workers, they spend that income on suits and shoes, and so on. And, by the time it’s all said and done every dollar of your purchase ‘stimulated’ more than a dollars worth of economic activity, which is measured as GDP.

For some reason, we don’t snicker when economists and politicians make this same claim. We should.

David Henderson, who doesn’t make this claim, does a great job explaining why we should snicker in his aptly titled essay, GDP Fetishism, which I discovered after reading a recent post of his about the ‘multiplier’ of foreign aid.

Also recommended, his latest post about subjective value, which is a topic we’ve touched on here recently in the comments.

Annoying quotes

From David Henderson’s post, Quotations from Alice Rivlin, on EconLog, Rivlin said:

If we didn’t raise the debt ceiling and we actually defaulted, we’d have a hell of a crisis. If the Tea Party is strengthened in the next election, we might have a default.

This is like the old joke, “I have a drinking problem. I don’ have a drink.”

If you don’t get it, Rivlin is concerned about a default occurring because Tea Partiers may get in the way of letting government spending run rampant. In Rivlin’s view, we need to let government spending run rampant to avoid a crisis. That’s like staying drunk to avoid becoming sober.

Here’s a great comment from that post from Ken B:

If the Tea Party had been ‘strengthened’ in elections going back a couple decades I doubt we’d have the crisis she worries about.

Justice Roberts makes a poor question subustitution

Here’s a great follow-up from David Henderson at EconLog to his previous post, my post on the government subsidy fallacy, and Bryan Caplan’s post on Kahneman’s new book.

In it, Henderson criticizes Justice John Roberts comment regarding government decency standards:

All we are asking for, what the government is asking for, is a few channels where … they are not going to hear the S-word, the F-word, they are not going to see nudity.

As Henderson correctly points out, the question isn’t whether “we” want cuss words and nudity on TV, but whether the government has the authority to tell us that we can’t.

Most people might think, but if most people agree, then I’m okay with the Federal government doing that.   However, the government was not designed to acquire powers simply through what I think sounds good or a public opinion poll.

It was designed to have its power modified via Article V of the Constitution: Amendment.

The Government Subsidy Fallacy

No Federal Department Left Behind

Just because you don’t think the government should do it, doesn’t mean that you’re against it.

David Henderson points out a Bastiat insight in this blog post that I, as well, find frustrating.  This is from Bastiat’s What is Seen and What Is Not Seen:

When we oppose subsidies, we are charged with opposing the very thing that it was proposed to subsidize and of being the enemies of all kinds of activity, because we want these activities to be voluntary and to seek their proper reward in themselves.

Henderson then shares a technique he uses in his economics class to illustrate this:

When I teach this article in class, I ask the students, who are almost all American, how many of them favor having government subsidize religion or requiring that people be religious. Typically no one raises his hand. Then I say:

Wow! That’s really something. I’m going to go home tonight and say to my wife, “Babes, I have a class of 25 people and all of them are atheists.” Did I get that right? Am I leaving something out?

The classic example of this is the Federal Department of Education.

Mention that we should get rid of it and — despite the fact that since its establishment per student, inflation-adjusted spending on public education has tripled while declining in quality, despite the fact that DC driven education accountability has proven not work (not under this guy, that guy, or that one) and the best accountability is parents, despite the common sense view that sending our money to Washington to have bureaucrats give it a hair cut and then send it back to our schools doesn’t make sense — you will likely be accused of being against education.

When actually, it’s just the opposite.

Make Someone Else’s Life Better

Econ Professor David Henderson gives a hat-tip to Bob Murphy for this wisdom from Will Smith:

Henderson likes Will’s wisdom at the 3:30 and 7 minute marks.  Me too.

I also liked what he had to say between 4 minutes and 4:35, especially this:

If you are not making someone else’s life better, then you’re wasting your time. Your life will become better, you know, by making others’ lives better.

As I commented on Henderson’s post, I believe most people will understand this wisdom to mean giving in a charitable way.  However, I also think it captures the meaning of this Adam Smith quote:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely.

Perhaps Adam and Will are related.

In this quote, the long-dead Smith explains the positive sum universe of capitalism: voluntary, mutually beneficial exchange. Simply put, we choose to trade with others because we value what we give up in the trade less than what we gain.  Likewise for those trading with us.

Even simpler: capitalism is win-win, not win-lose.

I’m certain Will Smith had a charitable note in his wisdom.  I’m also believe he included family and community responsibility.

But, given that Will has been quite successful in the capitalist realm, I imagine he understands and included Adam Smith’s secret potion that benefits so many people on a daily basis with so few of those people seeming to grasp it.  It’s why I get to eat king crab just about whenever I want.

Media Bias

Here’s an interesting real story of media bias from David Henderson of EconLog.  Thanks to Megan McArdle for the link.

The issue:  Mainstream media typically attaches ideological labels to conservative sources, but not to liberal sources.

David Henderson wrote about when this happened to him in the L.A. Times and how he confronted the reporter.  Not only did the reporter ascribe an incorrect ideology to Henderson, he didn’t subscribe an ideology to the liberal sources in the same article.

I persisted and asked him why he didn’t ascribe an ideology to the other economists quoted, who clearly had ideologies. He explained that I was the only one quoted who was critical of the Obama team.
“Did you hear what you just said?” I asked. “Only those who are critical are given ideologies.”

We can talk about media bias, but it’s always good to have specific things to point to.  This is one. There’s no reason not to be fair and consistent and ideological labeling.  Either label everyone or don’t.

I think we all tend to do that in our own minds as well.  Those who agree with us get no labels.  Those who disagree are labeled to explain away the disagreement.  Much easier to do that than to actually think about the disagreement.