I just finished watching a video of clip of Nancy Pelosi telling us how an unemployment cheque stimulates growth because it "injects demand into the economy" which also makes these payments a "job creator". Not only do these cheques turn "stone into bread" but they do it faster and more effectively than any other conceivable economic policy. What is really frightening about this dangerous bilge is that she and the rest of those economic illiterates in the Democrat Party believe it.

Irrespective of what she thinks economists call unemployment benefits "transfer payments", not stimulus payments. Transfer payments are not included in the national accounts because they do not add to GDP. In others words, economists recognize that these payments cannot add to demand or create jobs because they consist of the process of merely taking money from Joe to give to Bill. This raises Bill's purchasing power by the same amount as it lowers Joe's. It cannot raise aggregate purchasing power.

Unfortunately far too many of the economists who understand this fact seem incapable of carrying it further. If they did so they could easily see that the notion that politicians can overcome unemployment by putting people on the public payroll is as ridiculous as Nancy Pelosi's opinion on unemployment cheques. Nevertheless, Pelosi -- and those like here -- is of the view that paying someone to engage in any activity must by definition stimulate growth.

Obama is no better. His economic policy (spend, borrow, tax and regulate) is based on his faith in the ability of the state to create growth. This is just another way of saying that the public sector can drive the demand for labour. Believe it or not this is based on one of the oldest fallacies in economics and one that classical economics had thoroughly debunked. As John Stuart Mill wrote more than 150 years ago:

The utility of a large government expenditure, for the purpose of encouraging industry, is no longer maintained. Taxes are not now esteemed to be 'like the dews of heaven, which return in prolific showers'. It is no longer supposed that you benefit the producer by taking his money, provided that you give it to him again in exchange for his goods. There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasoning of the last two centuries, than the general reception so long given to a doctrine which, if it proves anything, proves that the more you take from the pockets of the people to spend on your own pleasures, the richer they grow; that the man who steals money out of a shop, provided that he expends it all again at the same shop, is a public benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman a fortune" (John Stuart Mill, Essays on Economics and Society, Collected Works of John Stuart Mill, Vol. I, University of Toronto Press 1967, pp. 262-63)..

A hypothetical example will should serve to reveal the extent of Pelosi's economic stupidity. Assume that Joe Sixpack loses -- through no fault of his own -- his $800 a week job. let us also assume that Obama, Pelosi, Frank and the rest of those compassionate Democrats impose a job tax on every household in Fred's street. Joe is now employed by his neighbours at his old wage rate. In return for their generosity he must maintain their properties and keep the street clean.

Presto! The street has now returned to full employment. (At this point I am quite sure that readers are having no trouble seeing the fallacy in Pelosi's 'reasoning'.) The first thing to note is that though everyone is working the street's total income has not changed. What has changed is the composition of its income. Joe's neighbours have had their total weekly income reduced by $800 in order to compensate Fred for the loss of his job.

The free market solution is to allow labour costs to adjust so that Joe can find another job that will add to aggregate demand. Under these conditions total incomes and payrolls would rise. But what happens when government policy prevents markets from making the necessary adjustments? Unemployment lingers. The more extensive the adjustments the higher and lengthier will be the rate of unemployment unless the government changes course. This is exactly what happened during the Great Depression.

Mill was speaking for his fellow economists when he stressed that the demand for consumer goods is not the demand for labour, explaining that if we mean by demand for labour that which raises the value of labour services then demanding consumption goods directly does not perform this function. (John Stuart Mill, Principles of Political Economy, University of Toronto Press, 1965, p. 80.)

From this it follows that demanding consumption goods directly, whether they be in the form of holidays, entertainments, medicine or education, does nothing to raise real wage rates -- intensify the demand for labour, as a classical economist would put it -- and hence the standard of living. The key phrase here is demanding consumption goods directly. But when we demand these goods indirectly, that is by increased investment in the higher stages of production, real wage rates rise. This is why Mill was able to say

I conceive that a person who buys commodities and consumes them himself, does no good to the labouring classes; and it only by what he abstains from consuming, and expends in direct payment of labourers in exchange for labour, that he benefits the labouring classes...(Ibid.)

In plain English, it's savings and investment that raise real wage rates and not tax-funded boondoggles.

When Pelosi makes the self-evidently -- at least to reasonably intelligent people -- stupid statement that taking purchasing power from A and transferring it to B raises total purchasing power she should be made to explain why tax cuts do not stimulate growth. Pelosi also argues that to save part of one's income lowers total demand. Yet to invest means to save. If she and her husband did not save his wide-ranging investments in resorts, vineyards, real estate, high-tech companies, etc, would eventually vanish. Now I don't think Pelosi is being hypocritical here: it's just that she is literally too dumb to figure that out.

One final observation. The number of comments from rabid Democrats supporting Pelosi's economic idiocy gives -- I think -- a good idea of that party's average level of intelligence. And these people have the gall to assert they are smarter than Republicans.