Thurston Howell the Third had a steamer trunk full of money, yet he lived in a grass hut. Just like everyone else on Gilligan’s Island.
Gilligan’s Island was the tale of a fateful trip that started from a tropic port aboard a tiny ship. It was suppose to be a tour, a three hour tour. But when the weather started getting rough and the tiny ship was tossed, if not for the courage of the fearless crew, the Minnow would have sunk.
Instead it ran aground on the shore of an uncharted desert island, with Gilligan, the Skipper too, the Millionaire and his wife, the Movie Star, the Professor and Mary Ann. There on Gilligan’s Island, where Mr. Howell lived in a grass hut despite his trunk full of money.
Mr. Howell, you see, was the victim of Say’s Law, which states that our ability to consume is created by our ability to produce. Because the castaways could produce very little, Mr. Howell could consume very little regardless of his great wealth.
Say’s Law is named after Jean-Baptiste Say, a giant of French economic thought from back when there were giants of French economic thought. Say’s view that wealth comes from producing things stands in sharp contrast with the Keynesian view that wealth comes from consumption.
Unfortunately, many of today’s economists and essentially all of today’s politicians take the Keynesian view. They believe that the global economic crisis is because our demand for stuff is too low. We simply aren’t consuming enough to achieve solid economic growth, full employment and a recovery worth mentioning.
Their cure is to promote consumption through stimulus spending, artificially low interest rates, and tax gimmicks. Since the beginning of the crisis, George Bush handed out $158 billion in tax rebates. Barak Obama spent $831 billion on infrastructure. There was the $400 billion TARP act and, demonstrating ultimate faith in the idea that consumption produces wealth, a $3 billion program to turn perfectly good cars into scrap metal.
Despite all this, there is no recovery in sight.
If only Bush, Obama, Geithner, and Bernanke had watched more Gilligan’s Island. Mr. Howell could have told them none of this would work.
While the show never said exactly how much Mr. Howell was worth, Forbes’ list of the 15 richest fictional characters estimated his fortune to be between 2 billion and 8 billion dollars. He did after all own downtown Denver. Taking the middle of that range, $5 billion, Mr. Howell could have “stimulated” the island’s economy to the tune of almost a billion dollars per castaway. If spending really caused prosperity, Gilligan’s Island would have been a new Atlantis. They would have been flying around the island with coconut fueled jet packs.
Instead, the castaways lived in poverty. No phones, no lights, no motor cars. Not a single luxury. Like Robinson Crusoe, it was as primitive as could be. All because they could produce very little and Say says that without production there can be no consumption.
It’s easy to see why the castaways’ production was so low. With just seven people, there weren’t enough of them to produce more than the bare necessities of food and shelter. Economists since Smith have known that the gains from specialization and trade are limited by the size of the market. Seven isn’t much of a market at all.
It’s harder to understand why our economy is so unproductive right now. Just looking around things seem OK. Our factories are still standing. The banks are flush with cash. We’re as educated as we were before the crisis. We still want a lot of stuff.
When you look beneath the surface, you see a very different story. The extremely low interest rates which the Federal Reserve has set to stimulate consumption have perversely destroyed investment. While consumer spending is back above its pre-crisis high and government spending is breaking every record, new business investment is down by 80%. Obamacare and the Dodd/Frank act have paralyzed businesses by creating what economist Robert Higgs calls “regime uncertainty”. Those acts require tens of thousands of new regulations which have not yet been written. Businesspeople cannot plan for the future because they don’t know what the rules will be.
Worst of all, much of the investment from the boom of the 2000s has turned out to be worth far less than we thought it was. We built too many houses which were too big. People and businesses took out loans for long term projects which in hindsight will never pay off. Students spent years learning skills no one really wants. It will take years for this mal-investment to work its way out of the system. No amount of stimulus can accelerate that process.
Gilligan’s Island may have been just a goofy sit-com, but its writers knew more about economics than today’s lawmakers. And that’s not funny.