Stimulating Ourselves to Death

[misle]

Interesting article about past government stimulus packages.

The biggest problem is that the government can?t inject money into the economy without first taking money out of the economy. Where does the government get that money? It can a) borrow it or b) collect it from taxes. There is no aggregate increase in demand. Government borrowing and spending doesn?t boost national income or standard of living; it merely redistributes it. The pie is sliced differently, but it?s not any bigger.

In fact, the data suggest that stimuli often end up shrinking the pie. In a 2008 paper, budget analyst Brian Riedl of the conservative Heritage Foundation summarized several studies that found past increases in government spending reduced the economic growth rate by between 0.14 and 0.36 percentage point. This means that every dollar?s worth of production used to satisfy the government?s demand is offset by more than a dollar?s worth of production that is no longer available to consumers and businesses.

Present or future tax increases that fund government spending often end up burdening the economy. Such was the case in the 1930s, during World War II, and in 1990s Japan. Thankfully, the 2001 and 2008 tax rebates, while ineffective as stimuli, didn?t make things worse.

I've always found it interesting to look back on government action and see what occurred, intended and otherwise. Of course, the otherwise is the interesting part.

 

[StageLeft]

Clearly and undeniably it does slice the pie differently. Pro-stimulusers (no jokes, please), say that although it does this it also ends up with the pie larger, the counter argument being that not only does it redistribute the pie but the pie ultimately shrinks.

The US economy has always flourished based on the idea that more private industry and less government intervention is the best thing for the economy and I see no reason to believe otherwise. The only exception could be in surgical cases like with the credit lock up. The argument is much harder to make that non-essential industries like auto should receive assistance, and Japan is a contemporary example of what too much meddling can do.

 

[Genx87]

Interesting read. Also interesting they dismiss tax cuts as stimulating the economy as well. Adds a little credibility to the article as it is also slamming supply side economics.

 

[dullard]

I've made very similar arguments in the past. Government deficits/surplusses affect GDP a little. But, if you then add the (GDP) +(deficit/surplus), the net change is basically zero. Once you consider interest, the net change is usually negative.

Think about your own finances. Suppose you made $50k a year (we'll ignore raises and inflation to keep things simple). Suppose you spent $50k a year. Your net "GDP" is $50k, meaning you get $50k of goods/services each year. Suppose suddenly you get a $20k loan repaid over 10 years. That one year your "GDP" becomes $70k as you can get many more goods and services that year. However, does anyone here really believe that you suddenly are better off just because you got a loan? No. That loan needs to be repaid. So, for the next few years, you'll have at least $2k LESS than $50k/year "GDP" since you have to use a lot of your cash repaying the loan. If you added your $70k "GDP" to your $20k deficit, you'd realize that you are right back where you started.

If that loan charges interest, your total "GDP" over the life of the loan is LESS than it would have been without the loan. Suppose over 10 years that loan cost $3k in interest. Your total "GDP" over that loan is $50k*10 - $3k = $497k. Without that loan, your "GDP" over the life of the loan would have been $50k*10 = $500k. The typical deficit lowers GDP since interest must be paid.

There is one possible exception. If you spent that loan improving yourself, then you could move into a better job and increase your salary. Then the question comes down to this: did the investment pay off more than the interest? The answer isn't always yes.

Same exact math happens nationally. It just becomes more complicated. The stimulus money will help GDP right now, but it'll harm it in the future for many years. If you took the more enlightened approach of adding GDP to deficit/debt, you can see that neither stimulus money nor tax cuts will necessarily help the economy long term. We are now at the lowest tax levels in decades and just got multiple tax cuts in the last year, yet we still are in a bad economy. Hopefully that finally puts the Republican's silly notion of tax cuts resulting in economic growth to bed. When this mess is over, hopefully the Democrat's silly notion that spending results in economic growth is also retired.

If this stimulus money is blown, there will be a shift of spending but a long term loss due to interest. If the stimulus money actually is spent well, we could position this country in a place that was better than before (unlikely).

 

[miketheidiot]

Originally posted by: Genx87
Interesting read. Also interesting they dismiss tax cuts as stimulating the economy as well. Adds a little credibility to the article as it is also slamming supply side economics.

i've read parts of several of those papers including the romer/romer one and i don't quite remember the general trend of the evidence being toward that conclusion. also, i don't think anyone really expects or claims that war spending is a particularly good idea. trying to track consumer spending during a war probably shouldn't show much either, afaik lots of stuff was rationed or just completely unavailable, during ww2, in a competition between guns and butter, guns definitely won.

 

[ElFenix]

depends on if you're at full employment (and not just of labor). if you're at full employment, the potential crowding out effects of gov't borrowing combined with the dead weight loss of taxes lowers economic performance. if you're not, it may be that gov't spending can help.

 

[Budmantom]

We got into this mess by spending too much and we are getting out of it by spending way too much.

How can this plan fail?

 

[Insomniator]

You can make anything sound great if you completely make up the effects it has/will have.

Rubbing poop all over stains will make your clothes smell fresh and be whiter then ever!!

 

[ericlp]

What about the part in the report where it underlines "where do we keep getting the funds to keep the stimulating" going?

What if china doesn't give us any more $$ for stimulus projects then what? I figured you needed lot's of money to keep things going. What happens when the creditors dry up and no money to barrow? Well, the report says it will raise taxes. Uh... I can see that going over well.

 

[Budmantom]

Originally posted by: ericlp
What about the part in the report where it underlines "where do we keep getting the funds to keep the stimulating" going?

What if china doesn't give us any more $$ for stimulus projects then what? I figured you needed lot's of money to keep things going. What happens when the creditors dry up and no money to barrow? Well, the report says it will raise taxes. Uh... I can see that going over well.

Don't worry Obama won't raise taxes on people making under $250,000, as long as they don't use energy, drive, buy food, buy from a large company or small business.

 

[BoberFett]

Originally posted by: Budmantom

Originally posted by: ericlp
What about the part in the report where it underlines "where do we keep getting the funds to keep the stimulating" going?

What if china doesn't give us any more $$ for stimulus projects then what? I figured you needed lot's of money to keep things going. What happens when the creditors dry up and no money to barrow? Well, the report says it will raise taxes. Uh... I can see that going over well.

Don't worry Obama won't raise taxes on people making under $250,000, as long as they don't use energy, drive, buy food, buy from a large company or small business.

"I don't want to sell anything, buy anything, or process anything as a career. I don't want to sell anything bought or processed, or buy anything sold or processed, or process anything sold, bought, or processed, or repair anything sold, bought, or processed. You know, as a career, I don't want to do that." - Lloyd Dobler

For some reason that line just popped into my head.

 

[Mursilis]

Please stop raining on my free-gov't-money parade!

 

[Robor]

Originally posted by: Budmantom
We got into this mess by spending too much and we are getting out of it by spending way too much.

How can this plan fail?

I'd love to hear you explain that.

 

[miketheidiot]

Originally posted by: ElFenix
depends on if you're at full employment (and not just of labor). if you're at full employment, the potential crowding out effects of gov't borrowing combined with the dead weight loss of taxes lowers economic performance. if you're not, it may be that gov't spending can help.

this as well

 

[miketheidiot]

Originally posted by: Budmantom
We got into this mess by spending too much and we are getting out of it by spending way too much.

How can this plan fail?

stunnign analysis, can i subscribe to your newsletter?

 

[BoberFett]

Originally posted by: Robor

Originally posted by: Budmantom
We got into this mess by spending too much and we are getting out of it by spending way too much.

How can this plan fail?

I'd love to hear you explain that.

Have you missed the last year or so?

 

[miketheidiot]

Originally posted by: BoberFett

Originally posted by: Robor

Originally posted by: Budmantom
We got into this mess by spending too much and we are getting out of it by spending way too much.

How can this plan fail?

I'd love to hear you explain that.

Have you missed the last year or so?

please explain how government spending led to the mortgage/financial crisis.


can't wait for these logical leaps, although i suppose i'll get nothing

 

[sactoking]

I know P&N is supposed to be more intellectual than OT, but I have to say it:

Replying to Topic: Stimulating Ourselves to Death

"Auto-erotic asphyxiation"

 

[JACKDRUID]

Originally posted by: misle
Government borrowing and spending doesn?t boost national income or standard of living; it merely redistributes it.

government spending actually does increase national income, or at least stop the shrinking of national income.

government spending = jobs, which leads to demand, then leads to businesses, leads to pie getting bigger.

government needs to have surplus in good times though... that means when our economy is good, government needs to increase tax and reduce spending, save money for future rainy days.

 

[Budmantom]

Originally posted by: miketheidiot

Originally posted by: BoberFett

Originally posted by: Robor

Originally posted by: Budmantom
We got into this mess by spending too much and we are getting out of it by spending way too much.

How can this plan fail?

I'd love to hear you explain that.

Have you missed the last year or so?

please explain how government spending led to the mortgage/financial crisis.


can't wait for these logical leaps, although i suppose i'll get nothing

I'll spoon feed you.

We as a country got into this mess by spending money we didn't have and buying items we can't afford (homes etc...).

Now our all knowing government will get us out of this mess by spending money it doesn't have, it will take from the private sector that is reeling and infuse it into the government, the same government that is spending money like drunken sailors.

 

[BoberFett]

Your words are to large for theidiot. Try monosyllabic.

 

[Budmantom]

Originally posted by: BoberFett
Your words are to large for theidiot. Try monosyllabic.

I was typing real slow I was hoping that would help.

 

[sandorski]

Interesting analysis, but it has a big problem: The Government isn't taking Money from the Pie, or more accurately, from the rest of the Economy. The rest of the Economy has pretty much shrank leaving a huge gap between what was a Year ago and what is today. One of the biggest parts to shrink has been the amount of Credit and as such the Governmet Bailout there is absolutely necessary and the Bailout of the Institutions who provide that Service is also very important.

When it comes to other stimulus, it also is not hurting Private Industry or taking Pie away from it. Private Industry is losing pie all on it's own, because the Consumption of Pie is falling off rapidly. Government Spending/Stimulus will Consume the excess Pie and in doing so maintain Economic activity while Private Industry finds its' way back to Growth. The spinaoffs of the Stimulus also include increased Employment and other activity which work their way to Private Industry.

I would agree with the analysis if it were given a few years ago when the Economy was Growing and Unemployment was Low. In fact, I made the same type of argument back then in regards to the huge US Deficits that were just accepted without much thought. "Deficits don't matter" was the mantra. Seems that Republican Deficits don't matter, but Democratic ones do. Funny that.

That said, these are extraordinary Economic conditions. Even Bush saw the Need for this Stimulus and it was one of the few things he got right. Government Stimulus is not taking anything from Private Industry, it is merely maintaining the Economy until Private Industry gets back on track.

 

[First]

Originally posted by: Budmantom

Originally posted by: miketheidiot

Originally posted by: BoberFett

Originally posted by: Robor

Originally posted by: Budmantom
We got into this mess by spending too much and we are getting out of it by spending way too much.

How can this plan fail?

I'd love to hear you explain that.

Have you missed the last year or so?

please explain how government spending led to the mortgage/financial crisis.


can't wait for these logical leaps, although i suppose i'll get nothing

I'll spoon feed you.

We as a country got into this mess by spending money we didn't have and buying items we can't afford (homes etc...).

Now our all knowing government will get us out of this mess by spending money it doesn't have, it will take from the private sector that is reeling and infuse it into the government, the same government that is spending money like drunken sailors.

You didn't really answer jack though. Exactly which dollars were spent that we didn't have and how did that lead to the current financial crisis? And since you knew of this beforehand, I am sure you have posts you can refer to where you predicted a recession based on that knowledge?

Here's hoping you don't wimp out like the rest of the conservative/Libertarian rejects here.

 

[BoberFett]

Originally posted by: Evan

Originally posted by: Budmantom

Originally posted by: miketheidiot

Originally posted by: BoberFett

Originally posted by: Robor

Originally posted by: Budmantom
We got into this mess by spending too much and we are getting out of it by spending way too much.

How can this plan fail?

I'd love to hear you explain that.

Have you missed the last year or so?

please explain how government spending led to the mortgage/financial crisis.


can't wait for these logical leaps, although i suppose i'll get nothing

I'll spoon feed you.

We as a country got into this mess by spending money we didn't have and buying items we can't afford (homes etc...).

Now our all knowing government will get us out of this mess by spending money it doesn't have, it will take from the private sector that is reeling and infuse it into the government, the same government that is spending money like drunken sailors.

You didn't really answer jack though. Exactly which dollars were spent that we didn't have and how did that lead to the current financial crisis? And since you knew of this beforehand, I am sure you have posts you can refer to where you predicted a recession based on that knowledge?

Here's hoping you don't wimp out like the rest of the conservative/Libertarian rejects here.

People borrowed money to buy homes that were overpriced from banks that were overleveraged believing that property prices can appreciate at 20% per year indefinitely.

Are you just acting stupid or does that come naturally? Nevermind, I realized who I'm talking to. I hear the help desk phone ringing, you should go answer it.