How stimulus plans are the true weapon of wealth destruction.
By Donald J. Boudreaux
To much applause, G-20 leaders affirmed their resistance to protectionism in yesterday's communiqué. "World trade growth has underpinned rising prosperity for half a century," the leaders proclaimed. "We will not repeat the historic mistakes of protectionism of previous eras."
That's excellent news indeed, but it is only half the picture. Although they swore allegiance to free trade, the G-20 countries promised to simultaneously pump $1.1 trillion of government stimulus into the markets. The two ambitions are diametrically opposed.
Uniformly across history and national borders, widespread prosperity is rooted in consumer sovereignty -- that is, in the insistence that producers exist to serve consumers, and not vice versa. To resist protectionism is to protect consumer sovereignty, which allows us to buy what we want regardless of its national origin. In a world where the consumer is king, producers compete vigorously to make their products and services more attractive and to keep their costs of production as low as possible. This competition ignites creativity. And as economists since Adam Smith have understood, a market is more creative, efficient, and responsive in direct proportion to the numbers of consumers and producers in it.
Free trade has another, less appreciated benefit: It frees domestic resources for use in newer, more productive pursuits. Workers, land, steel, fuel, and other resources in the United States that were once used to make, say, shoes and television sets, are today used to design Web sites, to erect cellphone towers, to carry out research in pharmaceutical labs, to perform Lasik surgery, and to do countless other jobs that wouldn't exist if trade were less open.
Trade fuels economic change, precisely what many crisis-wracked countries desperately need. Resources must be reallocated from inefficient activities -- such as the bloated housing market in the United States, or its automaker behemoth -- to more viable pursuits, consistent with consumers' genuine desires and abilities to pay. Inevitably, some producers will go bankrupt while other new industries will soar.
This economic change, however, is rather inconvenient for leaders hoping to "stimulate" the global economy. Economic change is a painful adjustment, and not one that can be completed overnight. "Stimulus" only delays the necessity of undertaking this process. By adding massive amounts of government demand to the demands of consumers, stimulus -- like protectionism -- keeps resources employed in familiar yet wasteful ways. When the government bails out failing industries, sets up home-mortgage subsidies, and props up sagging companies that agree to keep employees on, it prevents those resources from moving to new, more promising sectors. Stimulus, like protectionism, prevents the economy from shedding inappropriate activities and taking on more appropriate ones.
Government stimulus shelters producers from the need to adjust today to the true state of consumer desires. As a result, the future becomes less robust and less prosperous.
In short, protectionism and "stimulus" are at odds with consumer sovereignty and economic vigor. It's best to avoid them both.
Donald J. Boudreaux is chairman of the economics department at George Mason University.
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