Austin’s Win Is a Bay Area Loss—an Economic ‘Stimulus’ Parable

Big nerd that I am, here is a stray thought that popped in my mind on the shuttle bus from downtown Austin to Circuit of the Americas for the US Grand Prix last month: Am I currently stimulating the economy? A host of articles that weekend said I was, just as they claim the Formula One masses descending on Las Vegas this week are creating an economic boom. And yet. My spending that weekend was novel to Texas, but it was a goose egg for all the businesses I normally patronize on a weekend at home. At a national level it created winners and losers to no net difference. So naturally, I wondered: Does fiscal stimulus exist at all, or is it simply a misleading euphemism for shifting money from A to B? And if the latter, should investors ever factor in stimulus as a positive or its absence as a negative? Friends, hear me out, but I don’t think so.

The general principle here isn’t new—it is all just Frederic Bastiat’s broken window fallacy. That is the parable of the shopkeeper whose son breaks a window, forcing him to shell out for a new replacement. At least it will be good business for the glazier, says the busybody neighbor, as the shopkeeper must now shell out on glass! But the shopkeeper harrumphs, because he had been planning to buy new shoes, and now he would have to spend that budgeted money on a windowpane. The glazier wins, the shoemaker loses, while the shopkeeper has less money, a fixed window and no new shoes.

Bastiat’s point was that replacing destroyed property is a net loss to society, which loses the value of the destroyed good, rather than economic stimulus by way of new construction. But it also illustrates a broader principle: Money directed to A is money directed away from B, and there is every chance B would have been a better use—hence simply counting A’s winnings doesn’t mean the money actually added to economic output. It very likely created a winner and a loser.

So if we are isolating regional economies, then yes, it is true, I stimulated the Texan economy last month. I put money in the pockets of race organizers, who theoretically invest it in the city of Austin. I put money in the pockets of our wonderful Airbnb hosts, presumably supplementing their income and helping cover property expenses. Local coffee shops and grocery stores were beneficiaries, too. And someone will have profited from selling me overpriced t-shirts at the track, but alas, it is unclear from the receipts if those entities were local or ensconced in a tax haven somewhere.

At the same time, however, I was a drain on the Bay Area’s economy. Austin’s gain was a loss for my favorite bakery, coffee shop, farmers market vendors and family-owned grocery store. Had I been in town, I probably would have checked the new autumn selection at my local fabric shop. There might have been some Saturday night takeout from the local falafel joint.

If we extend the time survey beyond that one weekend, we can find even more losers. After all, even with careful price monitoring and advance planning, traveling cross-country for a motor race isn’t cheap—it is the sort of thing one budgets for, which for me meant forgoing other spending throughout the year. In the parallel universe where I didn’t jet to Austin to watch Max Verstappen fly around a track, I probably went to more baseball games or an extra IndyCar race, took a few more weekend day trips and caught a concert or three. Or maybe I would have splashed out on that U2 residency at the Sphere. Or or or! Point is, the money would have been spent, whether somewhere else or all at once. The total dollar amount wouldn’t have changed. Only the timing and destination.

Hence, in terms of my annual US GDP impact, it is a wash. A redistribution from California to Texas, not a net increase. And so it is with all such major events. They pull money from other places and endeavors—they don’t create new economic activity outright. Every win has a corresponding and usually unseen loss of an equal dollar amount.

Now apply this same logic to fiscal stimulus. I love tax cuts that put more money in my pocket. But it really amounts to the government confiscating less of my money and entrusting me to spend or invest it in a wiser way than they would. I happen to believe I am a much better steward of this than DC bureaucrats or those clowns in Sacramento. But that is my opinion, not a fact, and I guess it is theoretically possible others disagree. Either way, it is dollars that would be spent and invested. A shift, not a creation.

What about government spending and investment couched as stimulus? Here, too, it isn’t creating new activity. If the money comes from tax revenue, then it is the inverse of the preceding paragraph—governments determining where money goes in the economy instead of entrusting the public to direct it. If the government borrows to fund it, then we are merely redirecting private savings and investment first to US Treasurys, then to whomever the government chooses to spend it on. Where might it have gone instead? Perhaps bank accounts, to back new private lending. Or to private investments. Or stocks. In all cases, Uncle Sam and his clients win, other private entities lose.

So let us now think about it from an investment standpoint. Right now, after flat GDP in Q3, there is a widespread call for the UK government to jumpstart growth with fiscal stimulus. Chancellor of the Exchequer Jeremy Hunt has said for months that there is little to no budget bandwidth to do this, but that technicality isn’t stopping the Greek chorus. So if he pulls a rabbit out of the hat, will it be a magic elixir that turbocharges growth and helps UK stocks rebound from a tough year? Probably not—more likely, it would be a short-lived sentiment sugar-high with no net economic impact. And if the autumn budget statement disappoints? Fine, it probably wouldn’t have done anything anyway, no loss.

Similarly, in Japan, there is a lot of debate over whether a recent fiscal stimulus package is correctly tailored to boost growth. Some say yes, citing some modest tax cuts. Some say no, pointing out that funneling government money to the battle against hay fever is unlikely to spark some massive economic multiplier effect. Well, what if it is all just a shell game of money moving round and round? What if the net effect on domestic demand is zero, cementing the long-running status quo for Japan’s economic fundamentals? That would point to not getting overly excited or disappointed and simply riding the extant trend where multinationals flourish while companies more reliant on domestic demand have a harder time.

You see, by calling stimulus fake news, I’m not trying to rain on anyone’s parade—just to cut through the euphemisms to free investors from confusion. Every action has an equal and opposite reaction, including the spending of a dollar. Identifying the potential winners and losers from stimulus programs may help uncover investment opportunities, to the extent they aren’t immediately pre-priced, but that is about as far as I would go in terms of market impact.