Back in the 1980s, many commentators ridiculed as voodoo economics the extreme supply-side view that across-the-board cuts in income-tax rates might raise overall tax revenues. Now we have the extreme demand-side view that the so-called "multiplier" effect of government spending on economic output is greater than one -- Team Obama is reportedly using a number around 1.5.For Obama and the Keynesian Democrats, all of this stimulus money is free. That's not quite true when you look out into the future, though.
To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy's total output expands by enough to create the airplane or bridge without requiring a cut in anyone's consumption or investment.
If I take out a loan for $100,000 with a 30-year payoff and a fixed rate of 5%, I will get $100,000 on day one and will have to pay $6,441.84 in payments the first year. In the first year, I will see an increase in income of $93,558.16. Yay! I will have stimulated myself! Hurrah!
In year two, I will have $0 extra income and will have to pay $6,441.84 in payments. Owie! Dittos for years 3-30. That's what the stimulus is all about. A big jazz right now and bills on off into the future for as far as the eye can see. After all, we don't ever pay down the principal. Since we Boomers are starting to retire and won't be paying much in taxes, who will make those payments?
Careful with the self-stimulation....
ReplyDelete"For Obama and the Keynesian Democrats, all of this stimulus money is free."
ReplyDeleteNot so, though it is less expensive than opponents like to pretend for obvious reasons. Even Mankiw isn't disputing the need for stimulus, simply that it ought to be in the form of tax cuts over new government spending.
Anon, Even Mankiw isn't disputing the need for stimulus isn't much of an endorsement. If you're deep in debt, getting deeper in debt isn't the answer. None of them can answer the question of just why this is a good investment and how it will pay off in the future. It's all just spend, spend, spend!
ReplyDeleteI wonder if Dave Ramsey's most common answer (not on the radio, where there's a screener) is:
ReplyDelete"You are not chumps for saving your money and spending frugally. DO NOT GO ON A SPENDING ORGY, no matter what your government tells you."
I wonder when Dave's going to throw in the towel and tell people to buy houses they can't afford, buy giant SUVs to fill their new garages, max out the credit cards to fuel the SUVs, then demand bailouts when you're way beyond out of money and credit.
"None of them can answer the question of just why this is a good investment and how it will pay off in the future."
ReplyDeleteThe theory I expect you know. The typical argument against government spending is that it will crowd out more effective private sector economic activity. This is clearly less true when you have high unemployment and excess industrial capacity lying fallow.
In theory for the government to hire people that then go and buy things and pay taxes is better than to let them sit at home collecting unemployment, food stamps and so on until the private sector gets itself sorted out. If the government can also lay some infrastructure down in the process that will help when the private sector does recover, so much the better.
Anon, this stimulus package will be stuffed with unemployment benefits that will only incentivize sitting at home collecting unemployment and food stamps.
ReplyDelete$825 bil for a quick buzz simply makes no sense.
It's not 1930. We've already got Social Security, Medicare, Medicaid, Welfare, AFDC and so on. It's not 1950. We've got plenty of roads and bridges. Instead, we've got an existing debt crisis, mammoth unfunded pension problems and entitlements catastrophes coming in the near future. Blast $1T into confetti isn't the answer to this problem just because it may or may not have been in the past.
ReplyDeleteYou will cut spending and you will cut handouts. You can't avoid that. They can either be cut through hyperinflation or they can be cut deliberately and wisely. However you do it, in the end, you will cut them.
In 1930 and 1950, one could make the argument that government spending would lead to greater economic activity. You can't do that now. Government spending is already at levels undreamt of by either Roosevelt or Eisenhower.
I gotta go with the Obama "team" on this one.
ReplyDeleteLook, if I can get a 50% return (i.e., 1.5 multiplier) on my money, I'd put every cent of my wealth in that plan. In ten years, you could turn $100,000 into six million bucks. I'd sell my house, hock my wife's wedding ring, and jack my neighbor's car. I'd hit my sister up for a loan and pay her back at 10% interest because I can afford to be swanky. If I had a printing press, I'd even print some money to put in in that plan. Hell, I'd start wearing spats and carrying a walking stick. Give that man a see-gar!
Returns like that give me heart palpitations, a tingle up my leg, and a big smiley face. Just like the one they draw on the Kool-Aid pitcher.
Hey, there an idea! They should call it the Obama's Smileyface Kool-Aid Investment Plan!
Why stop at a trillion bucks? Let's invest a trillion trillion bucks. Think big! We're all going to be rich. Rich! Madoff got rich promising 10%. Why bother with Trickle-Down Reaganomics? Let's get right to Maximum Yield Thermonuclear Obamanomics!
And I vote we ditch ol' George and put the Kool-Aid pitcher on the dollar bill and Bozo on the $100. And while I'm passing those Bozos out, I'll just tell the caddy and the bag boy to keep the change you can believe in.
Maximum Yield Thermonuclear Obamanomics
ReplyDeleteSecular, that takes win, place and show in the Obamanomics slogan department.
Hilarious!
"In 1930 and 1950, one could make the argument that government spending would lead to greater economic activity. You can't do that now. Government spending is already at levels undreamt of by either Roosevelt or Eisenhower."
ReplyDeleteThat you don't buy the argument doesn't mean that it can't and hasn't been made. Everything from more mass transit, better highways, bigger internet tubes, smart power grids with power lines to renewable power sources could be undertaken. Then there is the type of base research that companies won't undertake because it is both too risky and not likely to lead to immediate products. Again, I can see reasonable arguments against, but it seems odd to say that "no one" can make them now.
While it isn't the great depression, there are some parallels. Herbert Hoover came in with a plan to reduce government spending. Certainly there were a number of factors that made it worse, but you will hardly find anyone that thinks that was the right move. Even the economist that you point to argues that the money should be allocated to tax cuts rather than government spending; not that it shouldn't be spent.