I don’t know if this belongs in GQ or GD, but here it is.
What is the economic rationale behind all these “economic stimulus” efforts? There was that check that the government sent out a while back, and all these recent and upcoming, massive spending measures. Everyone seems to take it for granted that the government running up debt and spending money on something, anything is supposed to somehow improve the economy.
How is this not just a variation on the Broken Window Fallacy?
War being good for the economy, that’s a broken window fallacy.
The rationale is that people aren’t spending enough money. By borrowing money and spending it, the government is hoping to jump-start things.
The government checks are aimed at a different objective, more or less, than infrastructure spending. The idea behind the checks was that people would run out and buy stuff with a government check. Most didn’t; they spent it to reduce debt, which doesn’t address what the government thinks is the issue.
Infrastructure spending is based on two things [ol][li]The idea that the unemployment rate will be reduced by infrastructure projects which will create jobs, and the money that people get for building infrastructure will get spent like the government checks didn’t.[/ol]The hope, if you want to call it that, is that we can end the recession and then cut spending/raise taxes enough to reduce the deficit back to manageable levels, and also pay off the accumulated debt + interest. [/li]
Politicians have to look like they are doing something. That’s the main reason.
Regards,
Shodan
[quote=“Shodan, post:3, topic:483080”]
Infrastructure spending is based on two things [ol][li]The idea that the unemployment rate will be reduced by infrastructure projects which will create jobs, and the money that people get for building infrastructure will get spent like the government checks didn’t.[/ol]The hope, if you want to call it that, is that we can end the recession and then cut spending/raise taxes enough to reduce the deficit back to manageable levels, and also pay off the accumulated debt + interest. [/li][/QUOTE]
Right. It’s classical Keynsian economics. You do that, and you lower the interest rate and hope it stimulates spending.
BTW, to add to what others have said, it doesn’t magically improve the economy. It is a specific tactic to take against recessions. If we are not in a recession, then all bets are off.
Infrastructure spending has two other advantages: It (usually) spends money that will circulate more in the economy because the labor and raw material are within the U.S. economy, where even if everyone bought something new with their rebate checks, most of that money is flowing out of the country for imported finished goods. Secondly, if projects are chosen wisely, it will have a long term beneficial effect as it aids in the future financial growth. For good or ill, the expansion of cheap shipping and easy commuting that has happened since WWII is at least partially due to the interstate system.
Jonathan
Not to mention the government gets something back when it invests in infrastructure. Let’s talk about say a freeway project. The government lays out big bucks to a general contractor. The contractor makes money and pays tax on his profit. His employees make money and pay tax on their incomes. Material suppliers and their employees make money and pay tax on their incomes. All the above spend money on houses and food and cars and such and provide jobs, all of which pay income tax on all their incomes. So the government eventually gets much of the money back in taxes, the economy is stronger, and the nation is now more competitive because it has a better infrastructure. It makes more sense to me than borrowing from our children to buy electronics from China.
On posting I see that Strassia has made similar points.
If we started busting up roads and bridges just to build new ones it would be. Creating new projects or expanding existing ones isn’t “broken window fallacy”. It’s not helping the highway construction guy at the expense of something else.
Think of it as if the government paid the glazier to go around upgrading people’s windows to new, more heat efficient ones.
Which in fact, not in metaphor, would be great! Somebody send a proposal to Congress!
It is related to the broken window fallacy. The Keynesian claim is that a stimulus can work because of the ‘fiscal multiplier’. For example, the government gives someone a thousand bucks. That person spends it and gets something in return. But now the thousand bucks is in someone else hands, and they spend it, and so on.
Keynesian economists think they know what the fiscal multiplier is - 1.4, 1.5, 1.6, whatever. They think that if the government puts a trillion dollars into the economy, it’ll create 1.6 trillion dollars in economic activity.
Where the broken window fallacy comes in is in the unstated assumption that government is just as good at allocating that trillion dollars as is the private sector, and therefore there will be no economic loss from borrowing the trillion in the first place. This is, frankly, a load of crap. The government’s manipulation of the economy will distort prices, divert investment, crowd out private capital, and do other bad things.
It should be evidently clear that the government’s spending is not economically optimal, simply given the fact that the ‘stimulus’ package has already radically altered shape several times. ALL of them can’t be economically efficient.
In this last go-round, for example, Nancy Pelosi has injected a huge amount of money for family planning services. When questioned how funding family planning could possibly be seen as a stimulus, her response was, “if we don’t have children, it will save the government money in education and child health care.” This may be the most asinine statement a politician has made this year, and this year has seen a bumper crop of asinine statements from politicians.
The notion that there is a fixed ‘multiplier’ that applies to any spending level is also ridiculous. If that were the case, we might as well borrow and spend 100 trillion and make ourselves fabulously wealthy. It’s economic sleight of hand on the order of the Laffer Curve - an economic principle that is real, but limited in scope and applicability, but glommed onto by politicians to justify whatever it is they want to do.
So yes, there’s a broken window fallacy at play here, because the government spending will not be as efficient as private spending, yet they are treating it as if it will be. It’s also not going to be much of a stimulus, because the money isn’t going to get into anyone’s hands in any sizeable amount until 2010 or even 2011. Notice how three months ago the politicians were saying speed was of the essence, and how the timing was so critical that a bill had to be on Obama’s desk the day he took office. Well, now they’re saying “Hey, a couple of years isn’t so bad.” You can’t have it both ways.
This stimulus package has turned into nothing more than an excuse for big-spending politicians to finally spend money on the things they’ve wanted to spend money on for decades but couldn’t find the political capital to do so. Now they’ve got it, and by God they’re going to use it.
One final thought - given that this is a ‘balance sheet’ recession like Japan’s, what happens to that fiscal multiplier if the money gets spent, and the people who get it simply save it? That’s what happened in Japan, and that’s what happened to a large part of the first half of the TARP money.
This is a fiscal disaster in the making. And it comes at exactly the wrong time - Social Security and Medicare are soon going to be going from net contributors to the federal budget to being a net drain on the federal budget. And it’s going to get worse, and worse. And the U.S. is going to enter that dangerous period with deficits already in the trillions of dollars. This can not end well.
Sam the private sector has proven to be pretty poor at spending our way out of a mess. The rich save their money and the poor blow government rebates on necessities. That does not stimulate the economy nor create jobs as much infrastructure spending. In bad times, nay catastrophic times, almost everyone responds by reining in spending and therefore putting serious brakes on the econome .
Paul Krugman, Nobel Prize winning economist, addressed these points much better than I can in a recent NYTimes editorial called Bad Faith Economics.
Some quotes:
“First, there’s the bogus talking point that the Obama plan will cost $275,000 per job created. Why is it bogus? Because it involves taking the cost of a plan that will extend over several years, creating millions of jobs each year, and dividing it by the jobs created in just one of those years.”
"The point is that nobody really believes that a dollar of tax cuts is always better than a dollar of public spending. Meanwhile, it’s clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created (see the previous fraudulent argument) — because a large fraction of any tax cut will simply be saved. "
"It’s true that the normal response to recessions is interest-rate cuts from the Fed, not government spending. And that might be the best option right now, if it were available. But it isn’t, because we’re in a situation not seen since the 1930s: the interest rates the Fed controls are already effectively at zero.
That’s why we’re talking about large-scale fiscal stimulus: it’s what’s left in the policy arsenal now that the Fed has shot its bolt. Anyone who cites old arguments against fiscal stimulus without mentioning that either doesn’t know much about the subject — and therefore has no business weighing in on the debate — or is being deliberately obtuse."
It’s called Keynesian economics – which, BTW, has never been discredited, even though the assumption that it has been seems to be an article of faith for some reason in some circles.
That’s far different than saying that the money, when spent, will be spent less wisely than how the government will spend it. It goes without saying that during a recession such as this people are not spending the money. The question is whether the money, when spent, is spent as efficiently.
Yes, I’m aware that Krugman is a big fan of the stimulus. In a way, he’s one of the big driving forces behind it. It’s also no surprise that a very left-wing economist thinks that the answer to our problems lies in more government. I can point you to 100 different economists, some also with Nobel prizes, who disagree with him.
And I dispute that ‘millions of jobs’ will be created. That’s only true if A) the multiplier works as expected (it won’t), B) the government spends the money wisely (it won’t), and C) the money being spent would have just sat idle during the entire 3 years that it will take for the government to spend it, and the spending of it won’t crowd out private capital or have any negative effects of its own, such as a devaluing of the dollar or a necessary increase in interest rates to attract foreign capital.
This is specious reasoning. For one thing, tax cuts could easily be structured such that you get them if you engage in new economic activity (for example, tax cuts offsetting capital investment, or changing the depreciation schedules for new equipment). For another, Christina Romer, one of Obama’s top economic advisors, co-authored a paper which shows that fiscal stimulus has a very poor track record in helping recovery from recession, and comes in third in terms of bang-for-the-buck as compared to monetary policy and permanent tax relief.
I’m aware that monetary policy is near the end of its rope (although some economists argue there is still room left), although it strikes me as ridiculous to say that since the one thing that’s been historically proven to work isn’t available, we should resort to doing the thing that has been historically proven to not work very well. Remember, there is a potentially huge downside to this stimulus - it’s a real budget buster. The U.S. is on its way to spending itself into a corner - creating a situation where it will no longer have the ability to borrow money at low interest rates from the rest of the world. That will tie its hands if the crisis deepens or other events in the world require that spending. It’s a very risky game to play.
Finally, the way this ‘stimulus’ is shaping up, the result will be a huge, permanent expansion in the size of government, which is going to hurt the U.S.'s long-term competitiveness.
I enjoy your posts Sam Stone.
{just posting it to give you encouragment so you do it more 
}
Sam, before I respond to your post, I would like to hear what you feel the problem with the economy is now. How could it get this way?
Me too.
But I think Shodan got the real answer right here:
Frankly, I think the business cycle is a fact of life, like tornadoes and earthquakes. You don’t just “fix” recessions, you weather them out. But it is career suicide for a politician to say so. And I take comfort in the fact that even if the worst happens and we plunge into a decade long depression, our standard of living will nevertheless be vastly greater than even the “booming” 1950s.
But hey, that’s an opinion; I’m far from an expert.
The economy got this way because of numerous factors, but the prime factor was the collapse of the large real-estate asset bubble. Real estate prices became inflated in the U.S. due to multiple factors:
Excess demand caused by government policy (mortgage interest deductions, the CRA, Fannie and Freddie’s loose credit policies, etc)
An increased willingness to take risks, created by the very long economic expansion which diluted people’s memory of what a downturn looks like.
The creation of various derivative vehicles in the financial markets, which made it too easy to hide risk. This in turn was driven partly by the fact that the Fed maintained very low interest rates for a long time, which caused capital to seek ways of increased return.
These elements fed on each other to create a classic bubble. When it finally popped, the banks realized their debt they were holding was of questionable value, and people stopped spending money they didn’t have. Remember the ‘wealth effect’? That was people borrowing money against paper assets - the value of their property was going up, making them feel wealthier, which encouraged them to spend more money. When the real-estate bubble popped, the velocity of money plummeted not just because the banks stopped lending, but because people stopped spending once they realized they weren’t as wealthy as they thought.
This is very similar to the recession that happened in Japan. Japan boomed in the 80’s because of their own asset bubble - at one time, real estate was so ridiculously priced in Japan that the grounds of the imperial palace were, on paper, worth more than all the commercial real-estate in Canada. Companies and individuals borrowed against these illusory assets, and when the bubble popped, everyone realized that they were in way too much debt, and the economy began a period of saving and retraction. The Japanese government tried numerous fiscal stimuluses of the type the U.S. is about to try, and none of them did a damned bit of good and only succeeded in turning Japan into one of the biggest debtor nations around. That recession has taken 15 years to shake itself out.
This is the problem the U.S. is in - the collapse of the real-estate bubble has pulled the mask off the party and shown that a lot of the economic growth of the last 10 years was built on assets that don’t exist. Now there has to be a correction. Government thinks it can solve the problem with even more borrowing and spending, but it won’t work. Ultimately, the balance sheet has to be corrected.
The correct fiscal policy right now is, IMO, is a mild increase in government spending, targeted at those hit worst, in an attempt to soften the blow to those hardest hit, while leaving as small a footprint on the economy as possible, so it can shake itself out and correct for a real imbalance that must be corrected. Spend money on increased unemployment insurance, job retraining, some very targeted infrastructure spending aimed at areas hardest hit and where there is a pool of people available who are trained for the work that needs to be done. In all, maybe spending of about 1/3 of what Obama is proposing, coupled with some permanent tax cuts and regulatory relief to allow businesses a little breathing room.
Tax cuts! Of course! Recession? Tax cuts! A booming economy? Tax cuts! Broken leg, neuralgia, the heartbreak of psoriasis? Tax cuts! A ruinously expensive foreign war, being financed on the credit cards? Oh, definitely tax cuts. Just the thing! When you have piled all your money in the street and set fire to it, clearly the thing to do is smother the flames with gasoline.
Remember how the Bushiviks kept pointing to the “housing boom” as evidence that their marvelous policies were fruitful? Even as economists growled about a false image of borrowed prosperity? Trouble was, they were all building houses to be occupied by people with upper-middle incomes, that’s where the money was. But now we have more upper income housing than we have upper income people to buy them.
I concur. Tax cuts are the only way to get this economy moving again.
Just look at where the past eight years of tax cuts have gotten us.
Without those cuts, the recession would be even worse, and probably terrists would have attacked America again!
More of the same, but harder, is the way to fly.
The business cycle is a fact of life and must be weathered out. However, like tornadoes and earthquakes, some relief should be provided to those affected so they don’t end up sleeping in tents. Ultimately the rationale behind the stimulous package is that theoretically lets businesses stay in business or people stay in their homes long enough to get their shit together and become profitable again.
That’s why I always think the market is a far better allocator of resources than any sort of socialized government decision making. People can talk themselves into any sort of jackass decision. The market brutally forces people to decide between what they really need and what they just want real bad. Take away market forces, people allocate spending to all sorts of nonsense that no one needs because it’s all “important”.