Bastiat and the Stimulus

One of the biggest questions in Washington at this point revolves around what the effects all that spending has had for the economy. When a dollar is spent many analysts argue that it creates velocity - i.e. a person who spends a dollar in society that eventually gets recycled through various hands. That in brief is the multiplier effect. The Congressional Budget Office used some calculations (presented above) which estimate the effects of the Stimulus bill on the economy. I have always been skeptical of the concept because I am pretty sure there is a no uniform velocity for any degree of spending. I am not saying that CBO did something dishonest, merely that conventional wisdom here is mostly wrong.

The CBO estimates suggest that government spending is highly efficient in inducing velocity. That assumption is wrong. There is some efficiency loss in governmental spending whether it is for a commodity, income assistance or an infrastructure project. There are a lot of different estimates of the magnitude but the CBO methodology seems to ignore those effects. At the same time when the government precommits future taxes or inflation by borrowing there is an additional limitation on the positive effects of government spending. In both cases this is an example of what Bastiat called the "seen" and the "unseen." While it is fairly simple to estimate the direct effects of building a bridge or filling in someone's income, it is less possible to compare the effects of what would have happened in an alternative scenario where the government did not take the dough to give it away.