Even The Tax Cut-Friendly Have Keynesian Leanings
There's a really smart piece by Robert P. Murphy on the Mises Institute blog about how many of the well-intentioned media people opposing the so-called "stimulus" plan have actually "fallen into the Keynesian trap:
Rather than the politicians spending nearly a trillion dollars, they argue, it would provide much more stimulus if the government gave massive tax cuts. This would "put money back in the pockets of average Americans" and they would go to the mall and "get that money into circulation and boost the economy."...By justifying tax cuts on the grounds that the taxpayers will go out and spend the money, these critics actually concede the entire case. After all, why take a chance on those fickle taxpayers, who might selfishly decide to pay down some debt or to stick the extra cash under the mattress? If buying stuff is the way to promote recovery, then nobody can top the DC politicians.
Consumers Don't Cause Recessions
The biggest mistake in the "let taxpayers spend the money" argument is that it buys into the Keynesian notion that recessions are due to a sudden bout of squeamishness on the part of consumers.
...To hear some crude versions of Keynesian thinking, you would get the impression that businesses are in trouble because Americans all of a sudden just decided that they didn't like steak and they didn't enjoy plasma screen TVs.
Of course that's not what happened. Instead, what happened is that American consumers decided they weren't prepared to spend as much on these nonessential items. To prove that our recession isn't due to a lack of consumption desire per se, imagine that car dealerships announced they would sell each vehicle on the lot for $1. Or, those trying to sell their homes and finding "no buyers" could charge $10 for each property. Does anyone doubt that these firesales would unload all the excess inventory in a matter of hours?
And finally:
Why Tax Cuts Are Better Than Government Spending...In conclusion, the critics of the nearly trillion-dollar "stimulus" plan are certainly correct to call for tax cuts rather than more government spending. However, many of these critics couch their justifications in ways that actually prove the superiority of government spending. A correct analysis shows that it is better to let taxpayers keep more of their money, even if they use 100% of the savings to pay down debt. There is nothing magical about consumption spending, and in fact it was overconsumption that got us into the present mess.
I love these people. We've spent too much and racked up too much debt. What is their solution? More spending and more debt! I get incensed when I hear economists informing us that saving more will destroy the economy. I wonder if they even realizes how banks get money to lend in the first place ...
Charles at February 17, 2009 6:37 AM
Keynes was wrong. No country has ever achieved long-term growth through deficit spending.
The problem here, as in the 30s, is that too many people were overleveraged. At some point, the piper plays, and there's a massive deleveraging.
Anyone without sufficient capital to get through that is hosed.
The deleveraging we are going through right now is not on the consumer side, but the lender side. Taxpayers saving more is precisely what will stop that deleveraging from being catastrophic.
Don't look for it to happen. Instead, expect the market to test new lows today as that jug-eared moron finally gets around to signing the Comprehensive Ass Reaming.
brian at February 17, 2009 6:46 AM
Both of the commenters above have excellent points. Credit market frozen? Here's the solution: everyone spend every dime they make, so that there's no money in the banks! Yeah, that'll fix the credit markets! Obviously not.
The other nasty thing here is: There is only one way (well, only one way that doesn't involve stealing) to improve a country's standard of living: productivity has to improve. You have to be able make stuff cheaper, so it can be sold at lower prices. That's what makes the standard of living go up. But in order for products and factories and suppliers to improve their efficiency, they have to redesign products, buy new machinery, and spend time thinking about how to do things better. That takes investment, and investment ultimately has to come from savings. America has had a long run of inproving productivity, starting in the early '80s, but it is declining now. And it will continue to declien as long as their is no investment money to make improvements. And as long as government keeps taking an ever-increasing slice of the pie. Which makes the emphasis on consumer and government spending a double whammy. That's how you get stagflation, which is where we are headed.
Cousin Dave at February 17, 2009 7:48 AM
Cousin Dave - precisely.
I would also add that new employment comes from companies and entrepreneurs undertaking new capital projects. These firms and entrepreneurs need financing to undertake these projects. It's amazing that people don't realize where this financing obviously comes from.
Charles at February 17, 2009 8:26 AM
This stimulus bill might be the quickest way to see libertarian ideas implemented in practice, by hastening the collapse of the government.
My plan for that scenario is to be among the first to be eaten. (Better than being the last.)
Pseudonym at February 17, 2009 1:20 PM
The bail out and stimulus bills cost roughly 1.5 trillion dollars or $5000 per person. If you gave my family of four $20,000, we would probably do some combination of the following:
1) Save it (i.e. recapitalize the banks)
2) Spend it (i.e. boost consumer spending)
3) Buy a house (i.e. raise house price, reduce defaults, reduce banks bad debts)
4) Buy a car (i.e. rescue the car company)
5) Invest in stocks (i.e. help ailing companies, pension funds etc.)
In others, giving us $20,000 does everything the bailout and stimulus bills would do without government distortion.
Curtis at February 17, 2009 3:36 PM
Curtis, you're absolutely right. But, of course, to the people who are supporting this thing, the government distortion is the whole point.
Cousin Dave at February 18, 2009 7:35 AM
Leave a comment