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Thursday, September 12. 2013
Empirical evidence often suggests certain actions may yield desired results, because a rule exists supporting this action. We were told the stimulus would yield, at a minimum, $1.25 for every dollar spent. This multiplier has been seen before, is measurable (to a degree) and conforms to Keynes' prediction of a multiplier. Many people claimed the return on stimulus would be much higher - upwards of $1.75! But Keynes' 'rule' of a multiplier, just because it was observed, isn't necessarily a rule.
The truth is, we spent far more than we gained in GDP over the last 5 years. There is a reason for this. While a multiplier may exist, and probably does, the factor may vary. More importantly, it is likely to take place if stimulus is focused on productive activity, not consumption. We have spent the last 4 years pushing consumption, telling people to buy homes, cars, food or anything at all. Keep the access to money cheap and available, provide support ot everyone. But here are the results. It's true this data is for the G-7, but a quick review of data in the US shows just as bad a return on dollars spent.
In the 20 years prior to Bush's final year and Obama, the average deficit was roughly $253 billion. In the last 5 years it was $1,215 billion. Over 5 years, we spent $6 trillion more than we collected in taxes to generate....$800 billion in GDP growth. That's a return of 13 cents on every dollar of deficit. In the previous 20 years, GDP grew by $5.57 trillion compared to $5.069 trillion in deficit for a return of $1.10 on each dollar of deficit. At some point, the Keynesians have to admit defeat.
Some economists predicted a slow economic recovery. Even Krugman did. But sometimes you can be wrong, even when you are absolutely right. It's all in the context. Krugman is great at twisting context to suit his needs.
(It's worth noting the link to the Money article may go some way toward explaining why it's so easy to get food stamps these days. But then again, there are many different ways to look at poverty, which means how we address it needs to improve.)
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"At some point, the Keynesians have to admit defeat."
Theoretically. In practice, ummmmm, not gonna happen.
Let me see if I understand leftist economics. If Peter spends a dollar it only creates a dollar worth of economic activity. If the government robs Peter and give the dollar to Paul to spend, it creates $1.25 worth of economic activity. That sounds like the economists version of the physicists perpetual motion machine. The difference is that physicists know perpetual motion machines are impossible.
Any dollar spent creates, in theory, more than a dollar in economic activity. That's leftist or neo-classical, or even Austrian economics. The question to ask is "what kind of activity, and how much more does it create?"
In Keynesian economics, during a downturn, there is unused capital lying around. The concept being "the wealthy have too much money and are doing nothing with it so let's have the government take it and do something with it, no matter what that something is."
Even Keynes realized (though his followers often forget) that you can take that money, bury it in jars, and have people dig it up. It will lower unemployment, but do nothing to help the economy.
Fact is, you need to employ capital effectively. Austrian economics dictate that capital never lies fallow, even when it's sitting in savings. If it is in savings rather than being invested in production, that's because there is NO VALUE in investing in production. Having it sit in savings helps bring the investment equation back in balance.
So, in essence, savings is a productive use of capital when there is nothing productive to invest in.
Keynes says there is always something of value to invest in, so we'll take that money and invest it in places you can't see the value existing in...
In certain circumstances, very rare and unusual, this effect can take place and be observed. HOWEVER, just because it's observed once, twice or even three times doesn't mean it's always true. There may be mitigating factors (like government regulations, taxes, or restrictions) which created this inefficiency and the shifting of the cash (or the theft as you and I would call it) did actually ADD value - purely accidentally, of course.
The reality of the multiplier is that any time you spend a dollar, it cycles through the economy. If you pay me for a cigar, I use the dollar to buy gum and the store I bought the gum from pays the gum manufacturer, and so on. This cycle begets entrepreneurialism, and efficiencies are sought, and the multiplier takes effect. (that's one way to look at it)
Another way to view the multiplier, the strict Keynesian view, is that I take a dollar and pay you. You stick in the bank, who loans out 95 cents (keeping 5 in reserves). That 95 cents buys stuff, and the person who got paid puts the 95 cents in the bank, which then loans out 90 cents. And so on...that one single dollar eventually generates a substantial amount of business over a time frame.
The difficulty people often have with the concept is "where does the dollar come from?"
Keynes says "take it from the wealthy and give it to those who can employ it 'better', such as consumers who will buys stuff".
Austrians would say "create an environment whereby the wealthy can find productive uses for that money and employ people in efficient fashion, because that dollar only comes from productivity"
Without production, consumption is meaningless. Austrian views should tend to win out over the course of the business cycle, because that's what they focus on.
Yes, but Where does the dollar come from?
Don't say the federal reserve prints the money and sells bonds to cover the creation of those dollar bills, because WHAT does the bond buyer give in exchange for the bond?
It can't be money for then you would still have the "same" amount of dollars. You could say dollars if they were going to admit devaluation ie "you gave us one, and we printed two"
I was trying to speak in strict economic terms, rather than physical or financial. Yes, the Fed's printing is a problem. Set that aside and think of a fixed currency and the concept of a dollar springs not from a printed piece of paper, but the productivity inherent in the system.
A nation with no productive capacity does not need money. Barter will suffice. Productivity, from which commerce springs, creates the need for a currency.
Nicely stated. I'd be hesitant to go so far as to say barter will suffice. Barter is inefficient - I suppose if you take the stand that since you're not producing anything, the efficiency is irrelevant. Still, being essentially lazy, I find it easier to trade shells for eggs and bacon, and to sell my rabbits for shells - rather than run around trying to find the egg lady, and and the dude with the smoked bacon.
Then again - I guess that implies some level of production - hunting rabbits and gathering eggs, and smoking bacon - damn now I'm hungry.
Yeah OK - barter is sufficient, everyone will be dead soon enough.
For a really smart guy - Keynes was an idiot. (sometimes I think idiot and arrogant are semantically equivalent. Probably due to the incidence of arrogance leading to idiotic behavior.)
There was a science fiction story published in around the middle 1950s that addressed this in a funny way. Wish I could remember the title or the author.
Anyway in a future US, robots did all the work with very little need of human 'help' and produced vast amounts of anything anyone wanted. As a result, the 'poor' were forced to overconsume [they were required to live in huge houses and wear out clothes very quickly and eat lots of expensive stuff] in order to "keep the economy going." The wealthy, OTOH, were allowed to consume only as much as they wanted. The outcome was funny though.
Perhaps someone else knows the name of the story or the author.
I remember that story, I read it too. Can't remember it, though.
Every dollar spent creates far more then a dollar in economic activity. This is true if the individual spends it and generally true if the government spends it. The difference is the government tends to spend it with their friends and favored groups. 100% of government construction MUST be all union. This adds at a minimum 30% to the cost of all projects. Next time you vote for a $100 million school bond to build a scholl just understand that $30 million of that was to buy fealty from the unions at your expense. This must be especially galling to non-union workers and small businesses struggling to survive and paying high taxes.
It's true that every dollar spent should equate to more than that dollar in economic activity. The question is, how much more activity, and what is the value of that activity.
For 20 years, there has been a positive relationship between deficits and economic activity. For the last 5, there has not. There are limits to what you can expect in terms of activity per dollar spent.
At some point, if you flood the market with dollars, you don't create more economic activity, you just create inflation and/or savings which go unloaned, as the Keynesian multiplier would suggest should not happen. As you probably know, bank reserves are at all time highs and only the very best risks are getting loans. In essence, the dollars spent in deficit are resulting only in savings as companies and banks await improved investment environments.