Here’s something every American should read and comprehend:
…Now we have the extreme demand-side view that the so-called “multiplier” effect of government spending on economic output is greater than one — Team Obama is reportedly using a number around 1.5.
To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy’s total output expands by enough to create the airplane or bridge without requiring a cut in anyone’s consumption or investment.
The explanation for this magic is that idle resources — unemployed labor and capital — are put to work to produce the added goods and services.
If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the added government spending is a good idea even if the bridge goes to nowhere, or if public employees are just filling useless holes. Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases.
What’s the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out.
What’s always bothered me about stimulus is that taxes are seized, not earned, so essentially the pro-stimulus argument boils down to an assertion that armed robbery is good for the economy.
Now, few will doubt we need taxes for external goods like national defense, courts and police, and we might accept other external benefits as well. But when you tell me we can use a system built to provide external benefits to produce demand, I must scoff rather heartily.
Isn’t it fairly obvious that the seizure of wealth is going to reduce overall demand by more than gov’t can create through the incidental feedback (i.e. people with jobs performing external services who then buy consumer goods) from externals?
If the argument is rather that the government can provide non-external goods efficiently, well, there wouldn’t be riots over rotting fish heads in Pyongyang if that argument had merit.
 UPDATE: I remember reading in the mid-1990s about Japan’s desperate measures in stimulus spending. They included a $200M golf course that had 3 members, and a billion-dollar bridge used by about a dozen people per day.
You can’t just conjure demand out of seized wealth.
Also, it’s a safe bet some politically connected people did very well at taxpayer expense on those projects. We’re already finding sticky fingers on the TARP, with politicians getting favors for friends. The stimulus is likely to be even worse. Blagoyevich-style Illinois politics is coming to Washington; the only question is how many people will get caught.
UPDATE: Note that this argument doesn’t really apply to purely redistributionary measures like middle-class tax cuts or welfare-like increases to the earned income credit, as opposed to public works. I might accept that redistribution could have some limited non-external benefit.
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Stimulus and Response,
Cliff Notes (re: Dave Price)
Now we have extreme demand side view
“multiplier†effect of government
spending on economic output is greater than one
Team Obama is reportedly using a number around 1.5. first assume that the multiplier was 1.0.
think, first assume
that the multiplier was 1.0. an increase by one unit in government purchases
thereby, in the aggregate demand goods
lead to an increase in real gross domestic product
If the government buys another airplane or bridge,
The explanation for this magic is that idle resources blah,blah, blah
if this mechanism is genuine,
why the government
should stop with only $1 trillion The simple theory Keynesian macroeconomic model
implicitly assumes blah,blah,blah
the government is better
than the private market at marshaling idle
resources to produce useful stuff.
Unemployed labor and capital can be utilized at
essentially zero social cost,
but private market is unable to
And the bottom line is
federal armed robbery is good for the economy.
The stimulus plan may in fact be better than just cutting taxes for several reasons. Given the current economic conditions, many taxpayers will simply use a tax cut to reduce debt (pay off credit cards) and not buy anything that stimulates the economy.
If the government spends the stimulus money on building and repairing significant infrastructure that is important to the economy, then this will create jobs in the US and it will be building infrastructure that will be the foundation of future economic growth.
Now if the stimulus money is wasted on silly things like golf courses, then the benefit will be much less.
Dave: It isn’t obvious to me. The simple fact is that our system makes it possible for some individuals to accumulate far more wealth than was ever possible in the entire history of mankind until very recently. And not everybody starts in the same place.
My view is that those who have more should give more, because they wouldn’t have so much more in the first place if it weren’t the system we created for them, and that protects it for them.
Isn’t it fairly obvious that a million dollars spent to build a public library is probably going to have greater benefits that Donald Trump buying another million dollar piece of real estate to put his name on it? I’m not so sure (and I have nothing against Donald Trump by the way).
Who has the right to say Donald Trump can’t buy that real estate? Do you? Do I? Does the federal government?
That Constitution says "no" to all the above. Whatever you feel the rich may or may not "owe" to anyone but themselves is purely theoretical and outside the realm of Constitutional authority. You, nor I, nor the government has any right deciding what is the best way someone spends their money. If you think you do then you need to tell me how the money you spend to buy games to play with your son is not better off going to a charity or to the homeless, and why you’re not sending it all there this very instant.
Because if you’re making that judgment call on the rich, you grant everyone the authority to make the same call on you.
Do I believe those that have more should give more? Absolutely. Do I believe those that have more should be forced or compelled to give more? Absolutely not. That is between them and their conscience/God.
And no one else.
mikeca,
You’re assuming it’s better for people to build a bridge than to pay off their credit cards, which probably isn’t true if they aren’t already building it. The marginal propensity to consume is partly a function of relative indebtedness, and regardless of how they get the money they’re probably going to spend/save the same way. Â
 The simple fact is that our system makes it possible for some individuals to accumulate far more wealth than was ever possible in the entire history of mankind until very recently.
Well, the old kings controlled a much higher proportion of overall wealth than any American could hope to (in theory, in fact, most ancient kings owned everything in their realm).   Our system makes it much easier for wealth to be spread around. We have much greater overall wealth as measured by utility  than in the old days because we’re so much more efficient at creating useful things that provide utility to a large number of people.
Isn’t it fairly obvious that a million dollars spent to build a public library is probably going to have greater benefits that Donald Trump buying another million dollar piece of real estate to put his name on it?
It depends partly on where the million dollars comes from.Â
If the money was seized, then it was removed from the economy, providing both a disincentive to earn more money (as the earner knows some portion of it will be seized) and a reduction in the funds available to invest or spend.
Additionally, Trump is building real estate on the assumption people want to buy it. That means it will generate economic activity. A library may offer external utility but it doesn’t really help the economy much.
Another fundamental flaw with the "multiplier" is that sometimes resources are idle because the market has determined they are not useful, inefficient or poorly packaged (like failing companies). The "idle" state is generally a precursor to retraining (new careers), restructuring or other retargetting of the resources.
Deliberately financing those idle resources effectively strangles the economy be preventing the market’s optimization processes.
You’re assuming it’s better for people to build a bridge than to pay off their credit cards, which probably isn’t true if they aren’t already building it. The marginal propensity to consume is partly a function of relative indebtedness, and regardless of how they get the money they’re probably going to spend/save the same way.
There are thousands of infrastructure projects that have been identified, but are not being worked on because of lack of funding.
Our economy has been build on high levels of personal debt. In the current climate tax cuts, even middle class tax cuts, are not going to do much to increase personal consumption because most people are already in too much debt.
It depends partly on where the million dollars comes from. If the money was seized, then it was removed from the economy, providing both a disincentive to earn more money (as the earner knows some portion of it will be seized) and a reduction in the funds available to invest or spend.
This is really silly argument. Taxes are not removed from the economy. They are spent by government. Government spends money differently than individuals, but that spending is intended to be in the common good.
I don’t think you would argue that national defense and law enforcement are not in the common good. Building roads, water, sewers, and ports are all in the common good. Donald Trump paying millions of dollars for a piece or real estate may benefit the wealthy owners of real estate, but a public library benefits everyone.
The extremely wealthy are in part wealthy because the government has created corporations. Corporations are not a natural entity. They are created by government for the common good. Corporations allow wealthy individuals to make large returns on their investments and at the same time shelter their personal wealthy in the event the corporation fails. That is an enormous benefit for the wealthy. The result of that is a huge redistribution of wealth to the owners and managers of corporations. It is only fair that the recipients of that huge redistribution of wealth should be willing to share a part of it for the common good, since they are the major benefactors of government created wealth redistribution.
This discussion misses the entire point, naturally. The basic question at hand is whether a sudden stimulus can break the patterns and multipliers that make recessions especially painful and devastating.Â
Yes, that stimulus will cost money… but primarily in the future, when hopefully the economy is back on track. So discussing how a "seizure of wealth" can’t possibly accomplish anything good is, frankly, batty.
We’re facing a lot of self-fulfilling prophecies: banks don’t lend because they’re scared, which leads to more economic contraction, which makes them more scared, and so on. The hope is that the government can break this cycle early. Maybe it can, maybe it can’t.  But you’ve contributed no insight to that discussion whatsoever.
There are thousands of infrastructure projects that have been identified, but are not being worked on because of lack of funding.
I’m skeptical. How bad can things be when the Bridge to Nowhere was nearly approved?
Taxes are not removed from the economy.
Of course they are. Paying taxes is not an economic transaction.
They may be re-introduced into the economy later, of course, but first they must be seized.
It’s important to make the distinction between entities that earn income — e.g. you, me, IBM — by providing a service or product, versus those that seize income.
The stimulus plan may in fact be better than just cutting taxes for several reasons. Given the current economic conditions, many taxpayers will simply use a tax cut to reduce debt (pay off credit cards) and not buy anything that stimulates the economy.
Mike, part of the reason that credit markets are locked up is because so many structured investment vehicles are secured by consumer debt such as auto loans, credit cards, etc. If cash began flowing back into these vehicles it will go a long way towards putting liquidity back into the capital markets. That is probably more needed than the purchase of another flat screen tv.
Paying taxes is not an economic transaction.
You pay taxes, you get police, fire, schools, roads, national defense, social security and medicare in return. That is an economic transaction.
If you don’t like what you get for the taxes you pay in this country, you are free to move to another country that offers a better product for your taxes.
Mike, part of the reason that credit markets are locked up is because so many structured investment vehicles are secured by consumer debt such as auto loans, credit cards, etc.
The reason the credit markets are locked up is because nobody has any idea what those structured investment vehicles are worth. Some consumers paying off some of their credit card debt is not going to unlock the credit market. As long as unemployment is spiraling up, banks know that more people are going to be defaulting on their credit card debt and home mortgages. That just makes them more uncertain about what all those structured investment vehicles are really worth.
Mike,
And a good part of the reason that they are hard to value is because paying off credit card debt has slowed to a trickle. You stated (or at least strongly implied) that paying off credit card debt would be little help to the economy, I just pointed out something that you (as usual when it comes to finance) overlooked.Â
If you want to make the argument that consumer spending will obviously help the economy more than consumer debt reduction, lets hear it.
And a good part of the reason that they are hard to value is because paying off credit card debt has slowed to a trickle.
This is not the reason they are hard to value. The reason they are hard to value is hundreds of thousands of people are losing their job every month, and everyone knows that makes them more likely to default on their credit card debt.
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