One of North Carolina’s leading authoritarians and government mouthpieces once again further marginalizes himself with his dogmatic faith in Keynesian economics.
He takes umbrage with a recent blog post of mine that highlights the federal “stimulus” plan’s inability to create jobs. In his article, he cites a few studies, including one by the Congressional Budget Office and another by Moody’s Economy, claiming them as “facts” that the stimulus is indeed working. His blind and unquestioning loyalty to such oversimplified aggregate macroeconomic models is reminiscent of that of a puppy to its owner. I’ll leave aside for now how the government’s methodology of “recording” the alleged jobs “saved or created” is so fatally flawed that it became a national laughingstock and is now being changed, or Moody’s role in the financial meltdown; and instead focus on a few common economic fallacies put forth in his article.
First and foremost, nowhere in the article is there a single mention of where the money comes from to fund the stimulus plan. After all, the money has to come from somewhere, right? The author’s article neglects to mention this, leading one to assume he believes the money appears out of thin air (oh, wait; much of it does – but I digress). Whatever alleged jobs “saved or created” by the stimulus money necessarily comes at the expense of previously created wealth taken out of the economic system, or through debt removed from capital markets. Either way, fewer resources are left available for productive investment needed for job creation and rather consumed by government spending.
Secondly, he mentions that a third of the stimulus plan is devoted to tax cuts that “folks on the right” always say is the “best way to spur job growth.” Unfortunately, the “tax cuts” in the stimulus are not really tax cuts at all, but amount primarily to tax credits – i.e. handouts. Real tax cuts that “folks on the right” advocate for involve reducing tax rates on economic activity, thus increasing the incentives for more productive activity. But the article’s author can not be bothered with such details.
Third, the article’s author claims:
A North Carolina economist affiliated with the flagship of the Pope right-wing organizational fleet, the John Locke Foundation, says that money spent on food stamps or unemployment directly stimulates the economy because people almost always spend it. That helps create jobs.
Hmmm, a mysterious unnamed economist “affiliated” with the Locke Foundation made the claim. The article’s author apparently agrees with this proclamation, and believes it strengthens his argument that government “stimulus” creates jobs. But this too is a fallacy. Sure, people who receive food stamps or unemployment will likely spend most or all of those benefits. But where did the money come from in the first place? Again, the article’s author doesn’t mention. Furthermore, this notion is rooted in the belief that propping up “aggregate demand” is all that is needed to create jobs and economic growth. I’ve blogged before about how this oversimplifies the market’s complex productive process. In this case, let’s say someone receives food stamps. The recipient will go out and spend the extra money on more bread, for instance. But then what? The process for making bread and getting it to the stores is an amazingly complex process – if you don’t think so, read this classic essay on what it takes to make a pencil. But the purchase of more bread won’t necessarily create more jobs, because this notion overlooks the question: how will the additional supply of bread get to the shelves? Idle roofers, Wall Street investors, bulldozers and cement mixers now idle due to the housing bust don’t exactly fit into the structure of production necessary to produce more bread. More than likely, any additional labor directed toward the complex, multi-layered food production process will be bid away from other current uses. The result will be little, if any, net job growth.
The article’s author ends with this snippy comment:
…the Civitasers, and the rest of the right-wing crowd can never bring themselves to admit that the government they loathe can make investments that improve people’s lives, especially during an economic crisis.
Improve people’s lives?At whose expense? Whose lives are made worse off in order to fulfill these social engineering utopian fantasies? And what about the use of force to accomplish such goals?
Sound economic analysis reveals that government stimulus schemes can not improve people’s lives, only hamper economic growth that would actually help those most in need. There is a reason why this recession has lasted longer than any other since the Great Depression, and it is government intrusion into the market process that is to blame.
Steve Harrison says
Brian, I’m not really trying to get between you two guys, as most of this economic stuff flies over my head. But I wanted to point out what’s missing in your loaf of bread analogy.
It’s more than just the ripple effect from the loaf of bread purchased, that (subsidized) purchase also allows for the reallocation/elevation of (personal) budget spending into more discretionary consumption. Other goods and services, which would not normally have been purchased, are purchased. From what I’ve seen, buying more food only represents about 45% of that spending, so the rest goes elsewhere in the economy.
Now, that may open up other debate points, such as the costs associated with obesity or how using poverty-level folks as a consumer engine instead of encouraging wealth accumulation is not going to improve their economic resiliency. But there’s more here than just the loaf of bread’s supply chain.
Brian Balfour says
I think your singular focus on my bread analogy has confused your comment. I beleive, however, that the primary point you were trying to make is contained in the statement: “Other goods and services, which would not normally have been purchased, are purchased.”
The implication, therefore, being that these other goods and services would not have been purchased were it not for the government subsidy. This overlooks, of course, where the government gets its money in the first place to provide that subsidy.
The government must first remove that money from the economic system through taxation or borrowing (I’ll set aside for now the creation of new money to finance such subsidies). So to the flip side of your coin, we have to acknowledge the goods and services NOT purchased because the government removed wealth from the economy.
Steve Harrison says
Okay, I’ll go along with the deferred collection (debt) aspect, so we can envision a dollar being taken out of one hand and placed in another.
That spending displacement is still not a 1:1 ratio. I don’t have the figures in front of me right now, but I bet you guys do, because I think the following info was gleaned from either one of John’s columns or the Heritage Foundation (or both):
The higher you get in economic classes, the higher the personal savings rate. Even when you look at the net rate (including debt burden), those in the higher tiers are (I think) around 35%, while the lowest end up at negative 10%-15%. Like I said, I’m just drawing from memory, so those may be off some. And I also agree that reversing that low personal savings trend might be the best solution for bringing people out of poverty via wealth accumulation. But that’s another issue, for another day.
My point is, more of that dollar will go toward consumption of goods and services if it is in the hand of the food-stamp recipient, than if it is in the hand of the wealthy. Which, in turn, generates more commerce, which boosts retail numbers, which encourages more investment, which increases the value of saved monies, etc.
Is that formula ideal? No, of course not. Will that person who surrendered the dollar get the whole dollar back? No. But I would submit that, without that displacement, more wealth would have been lost in this country than if we’d done nothing.
Brian Balfour says
I’ve heard your argument many times before – classic Keynes. I don’t have the time to distill the complexities of capital theory and the intertemporal nature of investment, the tug of resources between the various stages of production, etc. as you fall prey to the fallacy of aggregation, this time in “investment.”
A couple simple questions that you may want to investigate to better understand the topic are: how can a soceity consume its way to prosperity?
and you say that more consumption spending “encourages more investment” – if the economy’s pool of real savings is depleted because that money was taken from “the rich” to be spent on consumption, just where will the resources come from for such investment?
P.S. Feel free to email me if you want to continue the discussion, no need to further clutter the comment section with a one-on-one exchange
Steve Harrison says
Clutter? It appears we also have different ideas about what blogs are for, but I’ll respect that and make this my last post on this thread.
I’ve railed against our consumer-based economy numerous times, as I’ve watched our “production” numbers melt away from manufacturing and into distribution and retail of imports. Consumerism is also responsible for our extremely high personal debt, and now it’s driving up our collective (government) debt. We need to develop more sound spending habits across the board, be satisfied with less, and live within our means. But I’m not sure our economy would like that.
Looking at it from your (free market) perspective, how would that thrifty future impact opportunities for entrepreneurs? Trying to generate commerce from a more wise and circumspect consumer base would seem to be a difficult proposition, and market forces would (naturally) try to circumvent that transition.
The plain fact is, is going to take a long time to evolve our economy into something that doesn’t prey on our weaknesses so much, and until that day, we’ll have to occasionally stimulate that sickly beast.
Brian Balfour says
If you are serious and intellectually honest, you will address the two questions I posed to you in order to better understand the shortcomings of Keynesian stimulus plans.
I may also suggest that you try to understand that the market economoy is a process, and not some mechanical device to be controlled by external forces.
If you are concerned about too much thriftiness dragging down economic growth, you may want to examine savings levels in different countries and their effects on economic growth (examine studies that look at long term trends, not just static data). I may be mistaken, but I beleive that its been found that higher savings rates translate into higher growth rates.
To oversimplify, there are two types of spending: consumption and investment, whereas investment is fueled mostly by savings. Your concern that a thrify society would would stunt economic growth misses the point. Thrifiness merely shifts the consumption/investment ratio of spending more in the favor of investment. More investment by firms increases productivity, meaning more jobs, higher wages, and more affordable goods. That is how wealth is created. Your “stimulus” schemes merely consume more resources that otherwise could have been used for productive investment.
You are trapped by yet another Keynesian fallacy: the paradox of thrift.
I would recommend this article to learn more about that topic:
Chris Hayes says
Sorry to jump in late here guys, but I wanted to ask Steve about one of his statements.
Steve, in your second comment (3rd overall) you say: “And I also agree that reversing that low personal savings trend might be the best solution for bringing people out of poverty via wealth accumulation.”
Does this mean you then would be in favor of private accounts within Social Security where individuals can begin to accumulate wealth and transfer that wealth from generation to generation?