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Wednesday, August 4, 2010

A Little Bit of Satire But Not Far Off The Point

Donald J. Boudreaux is a professor of economics at George Mason University in Fairfax, Va. His column runs twice monthly. Email him at dboudrea@gmu.edu.


Suppose that several years ago Uncle Sam -- pressured by the powerful lobbies of piano producers and piano teachers -- adopted policies to encourage the manufacture and purchase of pianos. Tax deductibility for piano purchases, along with special government-created agencies designed to make credit artificially inexpensive for piano buyers and manufacturers, were used to ensure that no American household was denied the dream of easy access to a grand or upright piano.

Pianos, being beautiful to behold with eyes and ears, were indeed produced and purchased in record numbers. Families that otherwise would not have purchased pianos actually did so because of these government efforts to promote these exquisite musical instruments.

Politicians and the punditry were well-pleased. The rate of piano ownership soared to an all-time high. Citizens took pride in owning their very own pianos, as well as in knowing that their country was so prosperous and humane that piano ownership was spreading across the land.

And piano teachers and piano tuners were hired in record numbers. Wages for these occupations rose. Many young men and women who might have trained to become nurses or carpenters or clarinetists became, instead, piano teachers and tuners.

Piano production, retailing, delivery, maintenance, repair and instruction all boomed. "The piano industry is a mainstay of our economy," many all-knowing talking heads explained.

But a few discordant notes eventually were heard. Because consumers' demand for pianos was never really as strong as government policy made it appear to be, some creditors who lent money to piano buyers or piano producers started growing anxious. "Will the demand for pianos remain artificially high long enough for me to be repaid?" many of these creditors wondered -- at first to themselves, but then more vocally.

These (reasonable) concerns gripped increasing numbers of creditors. Concern became panic. Even with government subsidies, creditors no longer wished to lend money to anything or anyone associated with the piano industry.

Demand for pianos collapsed -- and along with that came the collapse of demand for the services of piano makers, retailers, tuners and teachers.

"Greedy business people seeking a quick buck nearly destroyed this vital industry, thus threatening the entire economy," politicians all said in unison. "We must legislate to ensure that such a financial fiasco never happens again.

"But in the meantime," these politicians continued, "we must also stimulate the economy with spending to combat rising unemployment."

Pundits -- along with many of the land's most prominent economists -- agreed wholeheartedly: "Without massive government spending, the economy will collapse."

So Uncle Sam spent. And spent. And spent some more. Much more.

Some lonely souls wondered, however, what it was, exactly, that this spending was supposed to stimulate. After all, once it was clear that too many resources were invested in the piano industry, it was equally clear that these resources (including many workers) would have to leave this industry and find employment in industries that did not depend upon government to inflate consumer demand for their outputs.

This process of paring down the piano industry and building up other industries necessarily takes time. During this time, an unusually large number of workers are unemployed. This unemployment is the sad but inevitable result of the inappropriate investments made earlier in the piano industry.

So if the "stimulus" spending is to keep unemployment from rising, it would have to reinflate demand for pianos. That's the only way to avoid the time-consuming process of workers being laid off from the piano industry and finding jobs elsewhere.

But because the root of the problem is an artificially inflated demand for pianos, reinflating the demand for pianos only delays the day of reckoning.

If, instead, the stimulus spending does not reinflate the demand for pianos, then it won't prevent unemployment from rising. Workers laid off from the piano industry will not all find new jobs immediately. They'll be unemployed for a time.

The lonely souls who dared to question the received wisdom that stimulus spending is a "must" were informed that no industry would grow without stimulus. The pessimism spawned by the collapse of the piano industry spread like cancer throughout the entire economy. "Only government spending can kill this cancer," pronounced the pundits.

The lonely souls, though, would not be quieted. They asked: "Why not simply cut taxes throughout the economy? By allowing producers and risk-takers to keep more of what they produce, they'll be encouraged to expand successful businesses and to start new ones in search of profit. That's how economies grow and real jobs are created."

Alas, the lonely souls were not heard. Stimulus funds were spent in unfathomable quantities, yet the economy remained depressed.

Our little piano fable takes us to where we are in America today. It's too bad that the voices of the lonely souls are being drowned out by the cacophonous screams of the stimulus crowd.

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