Sunday, July 18, 2010

Pelosi’s words, like her policies, don’t add up

Published in The Tennessean, Sunday, July 18, 2010

Pelosi’s words, like her policies, don’t add up

by Richard J. Grant

There is a market for bad economics. That market exists largely to service customers who are active in what we might call the politicized sectors of life.

A recent example of bad economics being put to use was House Speaker Nancy Pelosi’s attempt to justify the extension of unemployment insurance benefits with a stimulus-multiplier type of argument. She now-famously extemporized, "It injects demand into the economy. It creates jobs faster than almost any other initiative you can name."

There is no word yet on whether Speaker Pelosi will test her theory by putting her economic advisers on unemployment. But one begins to see the brilliance of her party's actions in ramming through or threatening legislation that serves to keep up the unemployment rate. If only we lesser souls could understand her theory: the more money we take from people who are working to give to those who are unemployed, the more jobs we create.

True believers in the government's ability to “stimulate” sustainable economic activity correspond to those who, in another era, believed in perpetual motion machines. Perhaps one day we will find a way to receive the benefits of work without any net energy expenditure. But we're not there yet, at least not for the whole system or society.

Work is inseparable from survival. Someone must work to provide for the needs, and some of the wants, of our families. Unemployment, in the sense of not producing what is needed, reduces our assurance of survival. But those who live in a familial community will be helped by their fellows through periods of sickness, injury, or other misfortune. Such charity can be organized in many ways, and we can choose to support those that appear most effective. We could even, where constitutions allow, employ government to undertake charitable activities, and put someone like Nancy Pelosi in charge.

Given the volitional nature of an employment relationship, employment is not truly insurable. We corrupt both our language and our thought when we speak of unemployment “insurance.” If we are going to offer unemployment benefits, and thereby politicize employment, then we need to be honest about what we are really doing. We are shifting both charitable resources and responsibility from civil society to the coercive mechanisms of government. The relationship is changed, but if it is honestly understood and agreed upon, then it has some legitimacy.

This legitimacy is not unlimited, and it is tested by any attempt to extend any government service, including unemployment benefits. The moral environment is further polluted when bad economic theories are promoted in the political market for votes.

A better understanding of reality should help us survive in the “real world.” Systematic improvement in the physical sciences and economic science should help to improve our judgment. But politicization of social functions can corrupt not only those functions but also the sciences that inform them.

The 1930s economic theories of John Maynard Keynes have been warmly embraced by politicians who wish to justify the expansion of government spending and budget deficits in the hopes of promoting economic growth. This political usefulness better explains the longevity of Keynesian theories than does any internal merit.

The physical sciences are just as vulnerable to distortion as a result of political usefulness. Climate science has been brought down by serpentine political agendas and the intoxicating taste of government funding. When politically advantageous, we can replace Albert Einstein with Henny Penny.

Just as Keynesian economics helped to break down the protective stigma against debt, it has been used to promote the illusion that we can get something for nothing through political action. We should not blame Keynes for this but rather those among his followers who allowed political incentives and dreams to stunt the growth of economic science.

We can have an honest debate about the size and direction of government spending “multipliers,” but Nancy Pelosi's words, like her policies, don't add up.

Richard J. Grant is a professor of finance and economics atLipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays.

Copyright © Richard J Grant 2007-2010