The Great Repression
Niall Ferguson in the LA Times on the Keynesian pipe dream (more on Keynesian econ here):
There is something desperate about the way economists are clinging to their dogeared copies of Keynes' "General Theory." Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear.
Critique of Keynes here. Oh, and anyone who thinks spending big bucks on government programs is the solution to our problems should stop spending so much time hanging out with The White Rabbit and do a little more visiting here in the real world.
Scott Niederjohn, in the Sheyboygan Press, seems to have it right:
Choosing The 'Right' ProjectsAmong the most basic concepts in economics is the importance of choosing alternatives where the benefits exceed the costs. Projects undertaken by the private sector cannot escape this straightforward rule; generally leading to efficient allocations of capital. However, government projects are not subject to such a test -- leaving little reason to think governments will be successful at choosing the best projects to undertake. In fact, given the hurried nature in which these decisions will have to be made, it's likely many of the choices will be wasteful pork barrel projects chosen for their political, rather than economic, benefits. If bridge-to-nowhere-style infrastructure projects are funded, we can expect the multiplier estimated by the Obama team to be too high.
Overestimating 'Employment Effect'
The Obama economics team estimates that this stimulus package will create or save more than 3.7 million jobs. Such a result requires that the spending programs in the stimulus package primarily target and utilize unemployed workers. More likely -- particularly in areas like health and energy -- jobs will simply move from one productive activity to another in response to the new government spending. Creating projects that specifically target the skills and abilities of the unemployed is a nearly impossible task; suggesting that the net job creation from the plan may be significantly lower than advertised. Further, if more valuable private sector economic activity is crowded out by this massive incursion of government spending, the job creation from the plan may be negligible.
Not Addressing Cause Of The Crisis
This financial crisis arose primarily because homeowners took on too much debt and banks allowed them to do it. Why, then, would the solution to the crisis be for our government to spend too much and take on too much debt itself? At its core, our economic problems today stem from tight credit conditions. Banks and financial institutions are holding toxic debt; financial institutions don't trust each other and have become risk averse, causing banks to hoard reserves and not make loans -- bringing the economy to its knees. Increased government spending does nothing to address the root causes of this problem.
In addition to the aforementioned reasons to give pause, government borrowing -- the source of the stimulus money -- ultimately must be paid back. If government borrowing is excessive, at some point we will encounter a mix of high inflation, higher interest rates, higher taxes and dollar devaluation.
Let's hope President Obama's economic stimulus plan works. It seems likely to have some positive impact in the short run. Yet it's unlikely that government spending is the fix the economy really needs to recover in the long run.
Too much debt is bad, but I think it overstates things to say that it was the primary cause of the financial crisis. Easy credit made it possible for more people to buy bigger houses, pushing house prices up and spurring companies to build lots more housing. Too much housing caused prices to drop, so people with adjustable mortgages couldn't refinance, so they were foreclosed on, so the financial institutions that owned those mortgages suddenly found that their supposedly safe assets were worth a lot less than they'd thought. How those mortgages were packaged and resold contributed to the problem too. There are still too many houses, so the housing market will not re-inflate for a while.
If the government is willing to spend hundreds of billions on "stimulus" they should eliminate corporate taxes and call it a day. That would stimulate the economy a lot more than the proposed porkfest.
The sad thing is that this recession is an excellent excuse to cut government services.
Pseudonym at February 7, 2009 7:19 AM
Amy Alkon
http://www.advicegoddess.com/archives/2009/02/07/the_great_repre.html#comment-1625398">comment from PseudonymI agree with everything you're saying above. There was an editorial in the WSJ about eliminating corporate taxes, and it also talked about the great complexity of those taxes. This is also a drain on business, and in turn, on the economy.
P.S. I don't think eliminating corporate taxes is a reality, because, we'll never be able to eliminate all the government programs now in place that they're funding. Not unless we replace the entire government (the people running it, that is) all at once. And ignore the screams of people who complain that the government is no longer supporting honeybee raisers or whatever.
Amy Alkon
at February 7, 2009 7:28 AM
This is why I'm not in charge. I'd be dead in a minute.
Balance the budget you say?
Ok, kill all agricultural subsidies and nuke the sugar tariffs. Kill all ethanol subsidies and get rid of the requirement for RFG. That's probably a trillion right there.
Then cut the corporate tax rate, and make the Bush tax cuts as permanent as anything Congress will ever do.
Of course, Pelosi the Stupid wants to reverse those tax cuts immediately. What's in the so-called stimulus bill ought to clue you in as to the true goal of the Democratic party. Hint: It ain't a return to a free market.
brian at February 7, 2009 7:53 AM
I don't think eliminating corporate taxes is likely either, but I was surprised to learn that they only bring in a few hundred billion dollars a year in revenue, which seems quite affordable nowadays. Payroll taxes bring in twice as much and individual income taxes bring in three times as much. There are no easy answers or silver bullets, but it would be nice to see corporations relocating to the US for a change.
Pseudonym at February 7, 2009 10:29 AM
Stimulus Bubble - Trickle Down Stimulus
We have just emerged from a 3 year experiment in giant stimulus. The housing bubble WAS a stimulus. The government borrowed through Fannie Mae and Freddie Mac to loan to people to buy houses (construction, consumer goods, appliances) and to re-finance housing to buy everything.
The $2 trillion in sub-prime financing in the last three years delivered dollars to the people who spent it immediately on all types of stuff. That is a $2 trillion stimulus.
We are living now in the "post stimulus" economy produced by that giant stimulus. How do we like it?
That was the result when people promised to pay it back. What will happen now when the money is being handed out, with no hope of repayment? We have only the prospect of higher taxes on productive people, or high inflation. Tax the rich and tax the poor.
easyopinions.blogspot.com/2009/02/tested-stimulus-plan.html
A Tested Stimulus Plan:
We just tried a stimulus through housing policy.
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I think it is more than strange to believe that when the government buys 2 TV sets, the government gets 2 TV's and someone else gets one for free. A great deal. But, it is entirely due to miscounting transactions as being wealth.
If Obama (via Keynes) were correct, that $100 in government spending produces $150 in wealth, then we should all benefit from counterfeiting.
Let's Counterfeit Our Way to Wealth:
Snippet:
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This counterfeit money should have the same 1.5 multiplier associated with government spending. The money won't be saved, it won't go to the taxpayers (who have their own money), and it will get into circulation immediately where it can stimulate the economy and even create more tax collections.
Even better, there is no need to borrow money or raise taxes to get back the money, because this would create it at very low cost. The investment and job creation plans of the taxpayers would not be interrupted.
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Andrew_M_Garland at February 7, 2009 11:52 AM
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