Everywhere one turns today, he hears about how "the government" needs to "stimulate" the economy, and that such "stimulation" will provide a foundation for future prosperity. The implicit premise is that all the money spent by the government will be more wisely spent than if it were left in the hands of private individuals and institutions in this market. I question this premise not on the tried-and-true Hayekian "Use of Knowledge" grounds ; rather my criticism goes like this: what happens when you blindly pull the bottom legs of a Jenga tower (notwithstanding its quality)?Let's assume, for the sake of argument that the stimulus bill "works" in the short-term (functionality being tied to the decrease in unemployment). Let's also assume that government does indeed "place all the logs" in the places it thinks best. Here, the governmental spending (whose wisdom is questionable at best) is banking on its placement of all sorts of "logs" at the bottom or foundation of the Jenga tower that is our economy. But, such a drastic increase in governmental spending is clearly unsustainable (one eventually runs out of space on the bottom where he can place the logs). What happens when the spending that drove such development goes away because it is thought 'the storm is over?' In other words, what happens when we pull those base logs (notwithstanding the need to place the logs back on the top)? History has shown that we end up right back where we started (i.e. the tower collapses).
Anyone who thinks that President Obama's budget + Stimulus bill + Federal Reserve liquidity will result in a costless return to prosperity need only watch this clip to see what the future holds.
This doesnt make any sense. HAve you ever heard of the multiplier effect...the government takes the money from the private sector and it multiplies it across the population. Sure, there is soem deadweight created, but ultimately people are the ultimate beneficiaries of the bailout. Overall, this will allow the economy to get back on its feet.
ReplyDeleteTo clarify, using your point about Jenga, the money would "create" new blocks...while the government would take down the old ones.
ReplyDelete@2:23
ReplyDeleteThis makes plenty of sense (much more so than the multiplier effect so championed by Keynesians). A dollar taken is a dollar not spent or saved according to better information by an entrepreneur; notwithstanding the existence of transaction costs (which cuts even further into any sort of multiplier claim), the fact that the government takes a dollar and spends it according to how it sees fit does not make it $1.57 (or $2 or $3 or $100). I point you to: (http://cafehayek.typepad.com/hayek/2009/01/not-one-not-two-not-16-157.html). If the multiplier was indeed something that worked in reality, then Zimbabwe or the Soviet model would be the envy of the world. If governmental spending is multiplied by virtue that it is governmental, then we should abandon all private property and turn everything over to our local aldermen/congressmen.
@2:26
It is irrelevant if new blocks were created-- they still need to be placed and eventually removed by the change in policy.
@ 2:23
ReplyDeleteSee also: http://austrianeconomists.typepad.com/weblog/2009/02/go-forth-and-multiply.html#comments
I understand your point, but I am still a little confused. A lot of this money is technically not being taken out of the private sector; it is being loaned to the government from international (government) banks like the Bank of China. How is this "taking one more dollar" from the private sector? Maybe I am wrong on my assumptions.
ReplyDelete"Here, the governmental spending (whose wisdom is questionable at best) is banking on its placement of all sorts of "logs" at the bottom or foundation of the Jenga tower that is our economy."
ReplyDeleteI'm not exactly sure I understand your analogy. I understand the stimulus as premised on pouring money into the economy so as to temporarily replace the private demand that has disappeared in the wake of the mass uncertainty stemming from the recession.
Furthermore, the analogy is less than clear since you lump the many different government plans under the one term "stimulus."
Are you talking about the middle class tax-cuts? Or the stimulus to state and local governments? Or the random projects contained in the stimulus bill? Or TARP? Or Geithner's leveraged toxic asset plan?
I assume that each of these has different economic implications, but I'm not sure how any of them count as a non-removable foundation (your Jenga logs) to the economy. As I undestand Keyniansism, the made long-term concern of government stimulus is that it crowds out government spending, which would imply that an orderly unwinding of stimulus packages should be good for the economy in the long term.
While there are the upside risks of inflation do this spending plan (a low risk in my opinion, considering that we've just experienced significant deflation and inflation discounts debt), and the risk that the stimulus is not big enough to replace missing demand, I'm not sure how the concern that the "removal of stimulus funds" in the future will cripple the economy either a) operates and b) is a sufficient reason to sit on the sidelines.
I would also be interested to know what you think the government's role in this recession should be instead?
that youtube clip is fierce hahaha
ReplyDelete@ Denny
ReplyDeleteThe fact that the liquid funds are ostensibly from the Chinese Sovereign Fund (or whatever the hell it is called) does not detract from the underlying premise in the least-- the financing for the stimulus (which is only one leg of the stool) must come from somewhere and it will have to return and/or disappear in the near future. If anything, your point is doubly illustrative of the point I was trying to make: The Chinese leadership are taking one of their People's Jenga blocks that the People may have been more able to use effectively and are lending it to us; however, instead of putting that block somewhere that can be easily removed if and when it is demanded back, the Federal government is banking on making such a block a prominent part of the 'foundation.' To be concise, all wealth comes FROM the private sector.
@ Josh:
This nut is a bit more difficult and nuanced to crack.
(1) There are a couple of problems with your statement "[the stimulus hoped to] temporarily replace the private demand that has disappeared in the wake of the mass uncertainty stemming from the recession." Accordingly, the way I read your argument is thus: (A) Relative private demand is directly linked to relative certainty [the more certain, the higher the demand; the less certain, the lower the demand]; (B) The uncertainty stems from the recession; (C) Thus, using an identity property, the private demand is directly linked to recession; (D) Governmental action through increased liquidity and increased Stimulus and budgetary expenditures can temporarily manufacture a positive impulse on demand [note: it is logical and proper to 'lump' all of the governmental action together for the reason that they are no different than the many heads of one hydra]; (E) Thus when demand decreases for whatever reason, we should use government action to drive it back up to where it was when we were content.
Here's the problem: how do you know that the previous level of demand (and therefore certainty) was even optimal? How do you (let alone Tim Geithner, Pres. Obama, or anyone else) know governmental action is no longer needed, when all of the foreseeable short-term positive 'bump' is based upon governmental action? The short answer is you can't. As the recession of 1937-38 that followed the decrease in governmental expenditures in 1936-37 demonstrated, the idea that governmental spending can in anyway create sustainable economic development is not only illogical-- it is impossible.
As to what my position on the government's role in this recession should be: Get out of the way, be consistent, be even-handed, and, did I mention, get out of the way?