The Fundamental Economic Problem with Biden's Rescue Plan

March 31 gave us a statement on the American Jobs Plan, and April 28 saw President Joe Biden speak on it to the American people (well, roughly 8 percent of the American people). The goal of the law is the following:

While the American Rescue Plan is changing the course of the pandemic and delivering relief for working families, this is no time to build back to the way things were. This is the moment to reimagine and rebuild a new economy. The American Jobs Plan is an investment in America that will create millions of good jobs, rebuild our country’s infrastructure, and position the United States to outcompete China. Public domestic investment as a share of the economy has fallen by more than 40 percent since the 1960s. The American Jobs Plan will invest in America in a way we have not invested since we built the interstate highways and won the Space Race.

By increasing government spending, the Biden administration seeks to address infrastructure like highways, ports, and airports, as well as the electrical grid and broadband internet. For a longer list of the goals of the bill, read the full statement here.

This move, of course, will be lauded by many and disputed by others. But it does not seem too much to assume that both sides will miss the main problem with this bill. The Left will adore it for its brave use of the state to improve the lives of Americans, while the Right will abhor the bill since it is not their preferred form of big government spending (how dare we spend perfectly good money on infrastructure that could be used to murder innocent people in the Middle East?). What both sides fail to recognize is the economic reality of any and all state actions, a reality pointed out to us by Murray Rothbard in his 1956 article, “Toward a Reconstruction of Utility and Welfare Economics.” In that article, without having to rely on a single ethical judgment, Rothbard concludes the apodictic advantages of the market and the perennial waste of government expenditure.

Rothbard begins his reconstruction with two scientific principles: the unanimity rule and demonstrated preference. In Rothbard’s words, Wilfredo Pareto’s Unanimity Rule (reintroduced by Lionel Robbins) states, “We can only say that ‘social welfare’ (or better, ‘social utility’) has increased [sic] due to a change, if no individual is worse off because of the change (and at least one is better off).”1

Demonstrated preference is the idea that we can only know anything about someone’s value scale by observing actual decisions they make, usually in a market exchange. Any assessment of someone’s words would be psychological in nature and irrelevant for economics. With demonstrated preference, we can say that every voluntary exchange must ex ante apodictically result in an increase in social utility, for every exchange demonstrates a perceived expected benefit for both parties involved. Whenever an exchange is prohibited or mandated by the state, there must, definitionally, be some party that benefits and some party that is harmed, which makes it impossible to make any statement on total social utility given the impossibility of comparing utility interpersonally. Moreover, the presence of a harmed party means these actions violate the unanimity rule. We can confidently conclude, then, that any government interference with exchanges can never be said to increase social utility.

But the analysis does not stop there. All government action ultimately rests on its power to levy taxes. Taxation, though, is nothing more than a coerced exchange between the people and the state. Given this insight, not only can government interference never increase social utility, but no action a government could ever make could increase social utility.

All this leads to the following two conclusions: (1) the free market always increases social utility, and (2) the government can never increase social utility. The main problem with the American Jobs Plan is now clear. It is not the fact that it calls for more spending on infrastructure and promoting supposedly green technology, as opposed to, say, the military. Its problem is that it calls on the state to do anything at all. Biden’s call for increased government action will do nothing more than waste our precious finite resources. There is nothing proactive in the bill that can be said to lead to an increase in social utility, and the restrictions it places on the free market will fail to lead to a more prosperous society as well. The plan is to restrict the free market, the only mechanism capable of promoting the general welfare, and expand the role of the government, an institution that can never promote the general welfare. A job well done, Mr. President.

• 1. This is because if we were in a scenario where some people benefited while others were harmed, then any analysis would require an interpersonal comparison of utility, which must assume some ethical principle (and we are trying to be value-free here).