Economics is grounded in theory, yet at times economic theory’s fundamental components become mundane and fall by the wayside.
Frédéric Bastiat (1801 – 1850) made a claim foundational to economic theory that is equally valid today as it was during socialist France in the mid 1800s: “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”
While Bastiat’s perspective on the “seen” and the “unforeseen” perpetuated by his famous broken window fallacy has become a staple in economic theory, recent government spending proposals and public reactions fail to adequately consider alternate effects. As a result, mass hysteria can intensify emotions around a government action and confine long term costs and benefits.
Take for example President Trump’s proposal to increase military spending during the fiscal year by nearly 54 billion dollars. Rather than support increased military spending by tax increases, Trump plans to cut funding from other agencies and programs.
Funding cuts to the EPA and Department of the Interior have received significant backlash by the public and agency officials. Critics claim EPA funding cuts will endanger lives by significantly reducing or eliminating programs that mitigate pollution and conduct chemical screenings. Although plausible, this argument relies on the premise that funding for these programs is effective, and without sufficient funding there are no alternative means of improving air quality or environmental standards. What is less mentioned is what would become of these funds had they been allocated elsewhere or back in the hands of taxpayers. Perhaps a lower budget could potentially force agencies to eliminate waste and overhead costs and discover lower cost, innovative ways of dealing with issues. Bastiat reminds us that government spending extracts from the private sector. Furthermore, increased government spending does not necessarily lead to better quality just as decreased spending does not necessarily lead to worse quality.
As Bastiat wittingly remarked,
“Thus, if we ask that the state not intervene, by taxation, in religious matters, we are atheists. If we ask that the state not intervene, by taxation, in education, then we hate enlightenment. If we say that the state should not give, by taxation, an artificial value to land or to some branch of industry, then we are the enemies of property and of labor. If we think that the state should not subsidize artists, we are barbarians who judge the arts useless.”
“And if we think the government should cut the EPA’s funding, we are heartless industrialists who show no concern for the environment” could be added to that list.
As economists it is important to refresh our understanding of economic theory rooted in historic literature. Remember Bastiat’s lesson and consider potential alternate effects and unforeseen consequences or advantages before getting wrapped up in the idea that spending increases or cuts are simply “bad” or “good.”