Wednesday, May 14, 2008

Stimulus?

This is an old article, but I thought it appropriate to call out as we are just now receiving our "stimulus" checks.

In this world of ours, those resources going to the rebate recipients don't come from the Tooth Fairy. They have to come from workers and producers. If the resources come from workers and producers who thereby receive less for their work than they otherwise would have received, won't they in turn spend less? Of course they'll spend less, and the people who now supply them with less will also spend less, and so on down the line.

As my former colleague and friend Milton Friedman liked to say, "There's no such thing as a free lunch," and this rebate is exactly what he meant. The net effect is that the reduction in demand from those who pay the real resources will be exactly the same size as the increase in demand from the rebate recipients. It's sad but true. Income effects always net to zero in a closed system.

To see this point from a more generic standpoint, if the price of apples rises, it is true that apple growers are better off. Their income effects go way up, and they can spend more. But apple consumers are worse off because their incomes go down by the exact same amount, and they have to spend less.