Demand Denialism

I got to thinking about Frédéric Bastiat again yesterday since I saw an edition of some of his books in a bookshop window. So I went back and read his “What Is Seen And What Is Not Seen,” which I’ve seen a lot of people cite as the foundation for their opposition to stimulus policies. It’s an extremely insightful essay, but I think the correct way to understand it is as precisely laying down the theoretical conditions in which stimulative policies do work. The bulk of his early cases proceed by referring to a number of situations in which apparently wealth-creating activities are not in fact creating wealth because the money to finance them has to be taken away from somebody else. This, of course, is precisely why fiscal stimulus doesn’t consist of simultaneously increasing taxes and spending. Instead the idea of stimulative policies is to either borrow money or else actually increase the stock of money. This basically covers the points about broken windows, demobilized soldiers, and public works. And note that on public works, even Bastiat explicitly says that increasing public works spending during hard times is smart policy even if it merely shifts prosperity from the future to the present.

The bulk of the essay doesn’t acknowledge the genuinely stimulative possibilities of debt-financed or money-financed expenditures instead of tax-financed ones, because it doesn’t consider the possibility of debt-finance or money-finance. He does, however, eventually get around to discussing credit. Here he states that it would be impossible for the government to make society wealthier because “when a farmer borrows fifty francs to buy a plow, it is not actually the fifty francs that is lent to him; it is the plow.” And since society has a fixed stock of plows, if a loan guarantee leads a merchant to extend a loan to James that he otherwise wouldn’t have “It is not seen that the plow goes to James because it did not go to John.” Bastiat argues that “what one would like to think of as an additional loan is only the reallocation of a loan.” He’s sure this is right because “In a given country and at a given time, there is only a certain sum of available capital, and it is all placed somewhere.”

This may well be approximately true most of the time. But it also shows us precisely the conditions under which stimulative policies are needed, to wit those times when much of the “available capital” is not in fact “placed somewhere.” There might be, for example, widespread vacancies of usable retail and office space. It could be that factory owners have machines that could run 24/7 but aren’t. Airports could have runway capacity that isn’t being used. Airlines could have planes that aren’t flying as much as they might. Trucks and freight trains may run despite not being filled to the brim. Stores that are in business may let many of their cash registers idle unattended for long portions of the day.

The reality, in fact, is that an economy never has all of its capital employed at maximum feasible intensity. Of course, one cash register that’s only in use during peak times is no reason to hit the economic panic button. But the more idling you have, the stronger the case that policies to expand the money supply, expand the supply of credit, or increase government borrowing will not simply crowd out existing activity.