Nancy Pelosi and like-minded leftists defend extensions of unemployment insurance in large part because they claim it will “stimulate” the economy. The theory is basic: put money in the hands of those most likely to spend it, and with all that consumer spending companies and entrepreneurs will expand and add jobs in response to the heightened demand. Providing cover for this rhetoric is the Congressional Budget Office (CBO), which recently released another report attempting to “prove” the theory of unemployment checks as stimulus.
Unfortunately, the CBO and Keynesian liberals like Pelosi include some faulty assumptions in their assertions (note here that the CBO has a checkered history of assuming what they are trying to prove).
Economist Steven Horwitz does an outstanding job in this article of dissecting the fallacies included in this consumerism mindset, thus completely undermining any intellectual cover for the left-wing’s dogma that unemployment checks stimulate the economy.
One of the most pernicious and widespread economic fallacies is the belief that consumption is the key to a healthy economy. We hear this idea all the time in the popular press and casual conversation, particularly during economic downturns. People say things like, “Well, if folks would just start buying things again, the economy would pick up” or “If we could only get more money in the hands of consumers, we’d get out of this recession.” This belief in the power of consumption is also what has guided much of economic policy in the last couple of years, with its endless stream of stimulus packages.
It’s tempting to say that this is really a “chicken and egg” problem; after all, what good is it to produce things if there’s no one there to consume them? The way out of this circle is to recognize that we only have the power to consume if we have produced and sold something in order to acquire the means to engage in consumption. Starting the analysis with consumption assumes one has already acquired means. ….Putting more resources in the hands of consumers through a government stimulus package fails precisely because the wealth so transferred ultimately has to come from producers.
Sure, transferring money into the hands of those that will spend it sounds like a good way to get producers to expand their productive capacity (and create jobs) in order to meet that increased demand. But because scarce savings have been diverted toward consumption spending, producers lack the necessary resources to expand. Consumption of resources dwindles the economy’s stock of capital, and it is the accumulation of capital that is the necessary ingredient for a growing economy.