I found this tidbit in an article by Niall Ferguson in the Financial Times. Niall is comparing the deficits which financed World War II to today's deficits which are financing, err, whatever it is we're financing.
(T)he differences are immense. First, the US financed its huge wartime deficits from domestic savings, via the sale of war bonds. Second, wartime economies were essentially closed, so there was no leakage of fiscal stimulus.The second point jumped out at me. Today's deficit spending by the government can quickly leak out to China as we purchase imports. In World War II, the money went to shipyards in the US and from there to steel mills in the US and from there to iron and coal mines in the US ...
That tells me that the "Keynesian multipliers" that people bandy about - every $1 of government spending leads to $2.50 in the economy as the money moves about - are just nonsense since they are predicated, in part, on data collected in a closed wartime economy. That goes for tax cuts as well. Given $400 of tax cuts, the people that rush down to Best Buy to get a new TV are really just mailing their refund check to Taiwan.
It's something to think about.
4 comments:
The problem with your analysis is that WW2 lasted (for The States) 3 and a 1/2 years. The first 2 1/2 years of WW2 were spent making money selling the Brits and the Russians the armaments to continue the war.
The current war against Afghanistan has been going for almost 9 years and the war against Iran for 19 years (cold) or 7 years (hot). The only way this can be supported without selling more arms to other combatant nations is by borrowing.
You seem a pretty switched on guy, KT. Surely you can see that the invasion of the Middle East is what's causing you're budgetary crisis? The US govt is living beyond its means because it attempted robbery writ large and it didn't pay off as well as they'd hoped. So they had to borrow off China to balance the books.
At least the Greeks didn't have a perpetual war AND a financial crisis.
I'm not sure why Aon thinks you're talking about the middle east... you explicitly said you don't know what we're spending the money on.
I just want to clarify your "tax cut" bit... when RATES are cut, I can take MY money and send it to Taiwan or a local hooker or whoever. What's particularly frustrating is the CREDITS, where the government takes MY money and gives it to someone else to spend as HE wants.
When the government looks at my stuff and can only see it in terms of what the government doesn't have, that's bad.
(captcha: nosins. Does that mean I can start throwing stones?)
Thanks for the comments. When I reread this post, I realized that I had not explicitly stated what I had meant - "In a time when we're spending beyond our means ..."
If the government were running a surplus, then tax cuts would be grand as might some government projects. As for tax cuts in particular, I was suggesting that using temporary rebates as a stimulus would have less of an effect than you might think because the money wasn't going to stay in the US.
"comparing the deficits which financed World War II to today's deficits which are financing, err, whatever it is we're financing."
What you're financing is war.
Try selling bonds to keep the Afghan and Iraq campaigns going and see how long they're self funding.
@ Anon:America would vote with it's wallet and peace would reign. Do you want to spend your tax cut on war bonds or something useful that will make the countrie's economy (and your wallet) grow?
Cartcha: Hero. Got me buggered.
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