Pajamas Media

36 Comments

1. Bob:

President-elect Obama didn’t get where he is by promising good economic policy; he succeeded by promising to “spread the wealth around.” The Dems can’t wait to pass an “ecomonic stimulus” package. Some may still believe in Keynesian economics (and the Tooth Fairy), but I suspect that they believe more strongly that the people who get the “stimulus” checks will be grateful and will return that gratitude at the polls in 2010. Almost every Dem program is designed to make government bigger and thus make more people dependent on government. It’s not the economy; it’s politics as usual. The “Change we can believe in” will be a change to bigger government. You can take that to the bank.

Nov 21, 2008 - 4:05 am 2. ajacksonian:

What is even more interesting is that if you look at the GDP output for the era, the US recovered by 1936-37 (including the pre-1927 growth rate) and was then hit with the price tag for all the New Deal starting in 1938 which caused a recession. Combine that with the unemployment figures, however, and you get the result of each person employed being more productive, which is one of the effects of getting rid of inefficient businesses: those that survive or start-up with new manufacturing methods employ fewer people, but produce more goods at a lower cost.

When you get to WWII the New Deal retirement system kicks in just as the economy needs every worker of older age that it can get: from that you get the ‘temporary’ tax benefit to private firms to offer health insurance, which was previously a ‘perk’ to high paid employees and executives. That temporary relief became a permanent problem, so that we now spend more today, per person and adjuste for inflation, than our grand parents did on health care. It isn’t that procedures are too expensive, it is that health care is subsidized which sets a minimum floor of pricing due to insured payments and government encouraging increases in payments through the government run health benefits plans. It isn’t that so many people are ‘uninsured’ (and what an awful way to pay for something) but that so many *are*. Insurance only works if a pay-out happens rarely – and that is not the case with health insurance… but then learning that subsidies cause over-use of whatever is being subsidized is something politicians love to ignore, across the political spectrum.

Nov 21, 2008 - 6:10 am 3. Jason S:

Why even bother pointing this stuff out? Those of us who understand basic economics have been thinking and saying this stuff for years, while those who don’t have minds that are simply impenetrable to basic logic. They don’t care about “facts,” they only care about emotions – and after all, to them, the economy is nothing more than a stage on which to act out all of their favorite morality plays about “greed” and “sharing.”

I’m no economic expert but I can see immediately why increased public spending doesn’t work. Here’s something else which occurs to me (although I could be wrong – someone might set me straight if I am):

If you seek to stimulate the economy by taking money (capital) out of the hands of the producers and putting it in the hands of consumers, then don’t you limit the ability of the producers to increase production to cope with the higher consumer demand you’re trying to create? In other words, what’s the point of boosting spending power if at the same time you cripple manufacturing power? Surely there’s no point increasing consumer spending unless you actually have the goods available to back it up. Or else, more dollars chasing the same number of goods = increase in consumer prices, and nobody’s any better off (that’s before you start factoring in the loss in potential jobs created as a result of the confiscation of capital).

Nov 21, 2008 - 6:47 am 4. arthur:

we should keep the bush model of government and economics going because the economy is doing great right now?

Nov 21, 2008 - 9:27 am 5. Dr. Lumplevin:

Government handouts and local pork barrel projects certainly stimulate my economy!

That’s all I need to know.

Nov 21, 2008 - 10:02 am 6. Jarhead91:

Thanks authur for proving ajacksonian’s point so quickly.

1. Recessions happen regardless of who is living in the White House.

2. Congress, completely controlled by Democrats over the past two years, sets Federal spending and taxes. The President only has the power to sign or veto. I agree that Bush should have done a lot more vetoing.

3. My company, like most others, is waiting to see how the Democrats are going to govern. Are corporate taxes going up? If so, our investments are going abroad. Are we getting some bailout money? Regulations? Environmental requirements? Who knows? Businesses are not going to invest or grow until those questions are answered.

4. FDR and Hoover’s tax and spend strategies put the “Great” in the Great Depression. Who knows when it would have ended if WWII had not come along.

Nov 21, 2008 - 10:20 am 7. arthur:

Recall Reagan’s answer to those who worried about the exploding debt: “It is big enough to take care of itself.”

Nov 21, 2008 - 1:22 pm 8. Robert Hurley:

I’ll bet a lot of economists and wall street CEOs value your advice. What a dope!

Nov 21, 2008 - 1:49 pm 9. EW:

In an economy like this one, isn’t the illuminati forgetting that without jobs, a lot of the stimulus money is saved rather than spent?

Nov 21, 2008 - 3:20 pm 10. thegr8_1:

Memo to Government: Leave my d@mn money alone I know a hell of a lot better than you do what to do with it.

Nov 21, 2008 - 6:01 pm 11. Jeff:

Yeah, all of Obama and his leftist illuminati cabinet’s spending and taxation will stimulate us into a deeper recession. More government isn’t going to help the situation.

Nov 21, 2008 - 8:28 pm 12. cthulhu:

Keynesian stimulus works nicely if it’s applied to assets — the interstate highway system and TVA come to mind. When it’s strictly redistributionist “give to the poor”, it contributes to unproductive resource allocation (malt liquor, etc.) and becomes a drag on the overall economy. When applied to dumbass government priorities (e.g. Carter’s synfuels boondoggle), it has the double effect of allocating resources to useless money pits and staffing the agencies with politically connected useless people.

Nov 21, 2008 - 9:21 pm 13. Jake Peachey:

It seems theoretical intellectualism is the comforting process of taking real-world complexity to a simplified and reduced size; –allowing quicker and easier comprehension — even though these theories are most likely to be wrong because theory cannot account for all real world complexity (The “sciences” of humanities including theories of economics and finance)

We acquire a certain base theoretical framework externally — that big picture outline— for organizing the details into a seemingly coherent whole. After personal modification suitable to our temperament and aptitudes, we love the edifice of our theoretical creation — never mind if facts contradict.

Now, try to see if these solid historical facts can be explained within the theoretical framework that guides your perspective.

In spite of all the circumlocution and commotion by President Roosevelt, the 1930s President never came close to ending the depression economy. The massive deficit spending of World War II did end the depression economy and set it upon the road to postwar prosperity.

Consider World War II from an economic viewpoint. It was a huge public works operation financed by unprecedented deficit spending. It commandeered the productive capacity of this country and then destroyed this production in the battlefield. Why didn’t this bankrupt the country? Theoretically, an operation like that should have bankrupted the country like a “closed system” business operation would have been bankrupted. (Fortunately, free-market capitalism at the macroeconomic level is “open system”)

One can only imagine the derision and criticism had anyone of stature, in the 30s, proposed such a program to end the depression economy. But there’s no denying that World War II deficit spending did do it. Until one has a theoretical framework that can satisfactorily explain why World War II, not only did not bankrupt the country, but was the key factor in economic recovery — all one can do is bewail the problem without offering any solutions that will work.
“Open system” perspective: http://economics102.blogspot.com/

Nov 22, 2008 - 11:11 am 14. ron c:

What is a better way to provide jobs that to have a product [munitions] which are destroyed shortly are they are made. You never have an excess of them on hand and it is a way to transform raw materials into unusable junk.

Nov 22, 2008 - 12:43 pm 15. Richard:

Its republicans, not democrats you need to convince of the truthfulness of this thesis. Its republicans who have been spending down the treasury for the past decade. That’s the whole reason they got their asses kicked in the past two elections. If we can’t depend on republicans to exercise some fiscal responsibility, then what are they good for? Its the only reason that I tolerate all their incessant moralizing, their over-dependence on religion for their politics and their unending desire to get involved in the affairs of my bedroom. If they can’t control themselves when it comes to the budget, then they’re worthless. Which is exactly why they got their asses kicked. I’ve got 700 billion reasons why they should be fired.

Nov 22, 2008 - 2:47 pm 16. Bob C.:

Actually, the depression didn’t end until 1946 or so. Ask anyone who lived through the war, or read any available history, and you will find that the citize4ns at home still didn’t have much. Rationing and scarcicty were still the order of the day. Aggregate cash flow numbers mean nothing. The situation only got fixed when the wartime and other depression-era controls were lifted and after many trade limitations were listed. We might also remember that the US could also sell to the rest of the world as many other countries could not because they were lying in ruins after the war. In short, all WWII did was kill many millions of people, ruin the psyches of millions more, destroy untold amounts of wealth, and set economic progress back by a decade or more.

Nov 22, 2008 - 4:11 pm 17. wGraves:

Unfortunately, we’re testing this bogus theory again. How interesting. I believe that, during the great depression, most of the tax increase occurred in ‘32. I haven’t figured out why Mr. Hoover, after holding the line for several years, would decide to raise taxes in an election year. It doesn’t seem to make any sense from the practical perspective of trying to get re-elected, but it probably seemed like a good idea at the time.

Unfortunately again, it would seem to be crunch time for these theories. The half of Mr. Poulson’s 700B TARP funds which he’s already spent shoring up banks, including the one where he used to work, seems to have been vaporized already by short sellers. Too bad Mr. Cox is a fool on the subject of short selling and uptick rules. Maybe we should ask Robert Mugabe to take over at the Treasury, but then they seem to be following his policies anyway…print money. After all, my fellow Republicans seem to have vaporized more wealth through ineptitude than Mugabe has by design. For what they’ve lost they might have purchased Uganda lock stock and barrel. Now the Democrats are going to try to outdue the present crop of nitwits. Throw money at the Big Three, now there’s a novel idea. Amtrack only managed to sublimate 13B in a decade. GM and Ford will easily go better in a quarter, or maybe even a month if they really work at it. Oh yes, then raise taxes and abrogate NAFTA, starting a trade war with Canada. Charming. Can you spell Smoot-Hawley?

Nov 22, 2008 - 4:33 pm 18. Militant-Infidel:

RE: Jake Peachey (#15):

Nice straw man you built there. It actually made some sense until I looked at it logically. Bob C. (#18) showed the initial step of your fallacy. During WW-II, there was massive increase in destructive consumption as you describe, but also a massive increase in capital investments, the net result was a stagnant economy for the individual. After the war, the capital investment was already in place, and the “destructive” consumption ceased. Individual productivity, forced upon the economy by manpower shortages, and amplified by the capital investment, rose to unprecedented heights. We were able to sell our production for a profit instead of blowing it up.

Ultimately, it was the increase in worker productivity, enabled by capital investment that ended the Great Depression. Let us see how well worker productivity fares with “stimulus checks” drawn at the expense of capital investment this time around. It has never worked before, but I hear that since the “right” people are in charge now, it is bound to work this time.

MI

Nov 22, 2008 - 5:17 pm 19. Debunking The Myth That Government Spending “Stimulates” The Economy « The Urban Grind:

[...] money. This has become the gospel for Democrats and RINO’s. But here’s a look at why it doesn’t work. Share and [...]

Nov 22, 2008 - 8:43 pm 20. Keynesian theory and redistribution « Cadillac Tight:

[...] theory and redistribution Posted on November 23, 2008 by The Red Pill Here’s an interesting perspective against Keynesian theory for anyone else who’s into that kind of [...]

Nov 23, 2008 - 12:12 am 21. seeingright:

The only thing that is known to truly work is to lower taxes and help small business create jobs. Reagan had it right. The Stock Market approves because capital starts to filter down into the economy, the government approves because they receive more revenue from increased production and consumer spending, and the people approve because they get to go back to work. Government welfare programs don’t kickstart anything, they only seem to prolong a recession; FDR proved that!

Nov 23, 2008 - 2:43 am 22. Commentary » Blog Archive » Spending And What Else?:

[...] sledding to get businesses to invest and grow. In short, Obama is putting his eggs entirely in the Keynesian basket, which doesn’t have a great track record of [...]

Nov 23, 2008 - 5:22 am 23. Will:

“Why do politicians keep trying the same approach (Keynesian spending)?: Political power stems from control of spending. The more spending, the more political power, the greater the politician’s wealth. Witness Senator Steven’s house repair and Senator Obama’s additional lot size and book contracts.

Nov 23, 2008 - 8:26 am 24. Obama may delay tax increase on rich - ThePHINS.com - Miami Dolphins Forums:

[...] money as soon as they take it in. There would be nothing to inject. Plus, government spending is not a very good economic stimulus. The best way for government to help the economy would be to take less money out [...]

Nov 23, 2008 - 9:41 am 25. The Historic Failures of U.S. Government Stimulus Efforts « Free Market Conservatism in Western Kansas:

[...] http://pajamasmedia.com/blog/myth-government-spending-stimulates-the-economy/ [...]

Nov 23, 2008 - 12:31 pm 26. Jake Peachey:

Re: Bob C. (#18):

Appreciate the thoughtful response. The prewar economy was characterized by excess supply side capacity versus demand (farmers dumping milk, killing livestock and burning fields). The war economy was precisely opposite: due to war, more demand than supply thus rationing: so it is true the citizens still didn’t have much. But there was full employment with wandering hobos shanghaied off the streets to work in factories. The private economy greatly improved their equity position and when the war was over, with price controls lifted, there was a burst of inflation due to pent-up demand.

During deflation, when money supply is in a collapsing spiral due to debt deleveraging, the result is currency values soaring relative to other assets — the marketplace is saying that there is a shortage of dollars. This is nothing more than an imbalance in the supply/demand equation.

It is so simple to solve this problem that it seems to defy comprehension. Print money and introduce this cash flow into the private economy through tax rebates or cuts. This would be just the same as if the US treasury owned a mine, with a shaft of solid gold, for use in an emergency such as this. If this doesn’t seem like it’s possible that the value ascribed to dollars is “real” those dollars could be buried and recovered through mining with the purpose of installing “real” value to the asset .Of everything economic, value has no equal in fungibility, and it is just as important to create money for price stability as it is to stop printing money for inflation.

The government can indeed create an asset to which the marketplace will ascribe full value. And this would not be a liability to be paying off with future cash flow.

The Austrian economic thought certainly supports free enterprise, but it is closed-system in its financial perspective. The only thing the conservatives can offer from the Austrian perspective is the inevitability of financial collapse in severe economic downturn from excess credit expansion. Just try selling this load of pessimism to the electorate. This is the conservatives’ Achilles heel in the current crisis. The political party that allows this to happen will be tossed out of office and wander in the political wilderness for the next 40 years — if it doesn’t destroy the party.

Conservatives should (posthaste) support large rebate like cash flow into the private economy until asset prices stop declining and housing prices start levitating. At this point to crisis will be over because toxic mortgages will be tradable. Otherwise, the big government political class will offer the World War II argument for huge public sector spending that won’t end like it did when World War II was over. This could end up to be a permanent entrenchment of liberal/leftist European-style ruling political class which would destroy our dynamic entrepreneurial economy. It’s much better to have this money in the private economy for investment and consumer demand — for much greater multiplier effec. This allows the economy to grow in the direction it ought to.

Nov 23, 2008 - 1:27 pm 27. Stephen McQuade:

“…Unemployment remained very high throughout the 1930s and overall output did not get back to the 1929 level until World War II.”

But why did WWII end the depression? Oh, because government spending increased aggregate demand. That put the unused capacity of the nation to work.

Under serious recession/depression conditions deficit spending is indicated. The problem becomes it is addictive.

Nov 23, 2008 - 4:33 pm 28. The Historian:

AMERICA’S REAL ECONOMIC CHAOS
Those in charge, trying to fix this economy, don’t have a clue:

http://greensrealworld.blogspot.com/2008/11/americas-real-economic-chaos.html

Nov 25, 2008 - 8:54 am 29. The Folly Of USGOV Stimulus packages and Keynesian Economic Theory: (On the Bailout, Part 31) « PurpleSlog:

[...] blogged here, it may sounds [...]

Nov 26, 2008 - 3:46 pm 30. Pat:

Jake Peachey wrote at #28: “The government can indeed create an asset to which the marketplace will ascribe full value. And this would not be a liability to be paying off with future cash flow.”

Full value? To which individual valuers in which marketplace, and at what times and for what purpose?

Fiat money inflation (temporarily) benefits only those who are first to get the new currency – the politicians and their friends. From there, as the purchasing power of the dollar declines, each successive receiver and holder of dollars gets successively more shortchanged for his past real labor and savings. This is why counterfeiting – whether legalized or not is always morally wrong; it’s theft!

Mr. Peachey’s arbitrary floating abstractions need to be concretized – i.e., tied to perceptual reality. Fiat does not create real sustainable, stable, reliable value; only production of real, not fiat, goods and services can create real wealth.

This is the root problem of the mainstream modern economics profession: virtually no economist studies the root of economics – production and trade by individuals and incorporations. They’re too busy studying consumption for the statist folly of concocting ever more impossible schemes to centrally “plan” and manage” the flow of billions of individual trades.

Read J. B. Say, and learn, as Ayn Rand put it, that “When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others… Destroyers seize gold and leave its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values.” [like the FED] “Gold was an objective value, an equivalent of wealth produced. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked ‘Account overdrawn.’”

We need to return to free banking and privately issued, competing currencies. Then the quality of our money would be restored and its value would again be objective – set by millions of individual traders every day instead of by the whims of 12 Fed governors every 6 weeks.

Of course, the statists demand a monopoly on the issue of currency because if they had to compete with REAL money, they be out of business in a week and their giant looting scheme would be over.

Under a free market, only reckless fools would take Federal Reserve IOU Nothings in payment for their hard work. Abolish the Fed.

Nov 28, 2008 - 6:19 pm 31. Pejman_Yousefzadeh’s blog » Not All Of Us Are Keynesians Yet :::

[...] and present some reality-based economics to the self-styled “reality-based community.” Here is something from a few weeks back showing that Keynesian theory is all wet: . . . Keynesian theory [...]

Dec 6, 2008 - 11:18 pm 32. John:

Keynes’ general theory as any economics student will tell you is at the core of the practice of modern economics. That’s not to say other developments haven’t been overlayed upon it, but the general theory is still central. It’s basically practiced to a greater or lesser extent by governments of every description around the world, what else have Paulson and Bernanke been doing for the last year. Honestly, Keynes denial along with science/evolution/global warming and all the other denials is why conservatism and the GOP is so completely f$#@e&* up at present. I just read some of the stuff here and much it along with the original posting belongs with alien abduction belief, scientology, holocaust denial, Elvis sightings, and just about every other nutball theory that’s out there. If we carry on subscribing to this nonsense it’s going to destroy conservatism as widespread belief system and reduce us to a lunatic fringe.

Dec 7, 2008 - 1:52 pm 33. hubbard47:

I find this article simply untrue, the fact that Keynesianism has been a sound economic theory for almost 80 years and is now being undermined isn’t right.
It is correct, in stating that the money governments spend has to come from somewhere, mainly out of the ‘economy’s pocket’ but when borrowing occurs, it borrows onto the government debt, meant to be re-payed in times of prosperity. It does not simply redistribute wealth right there and then. What the government should be doing, is borrowing now, whilst the economy heads to recession, and increase spending in order to bolster consumer spending and investment, but then be taking the money out of the economy in the good times, ‘the boom’. This way the two extremes of the standard boom and bust economic cycle are softened and the standard of living can still increase over time with recessions being shallower and shorter, and booms not being so dramatic and, increasing inflationary pressure.

Dec 18, 2008 - 1:16 am 34. Time to say goodbye to 2008, Year of the Bailout « Senate Conservatives Fund:

[...] will say these government-run projects will stimulate the economy but that doesn’t make it true. How many times have we seen Congress over the last year spend money for the sake of the economy [...]

Jan 2, 2009 - 6:15 am 35. Charging Elephants .com » California Progressives Fail Economics 102:

[...] 1) Government is a weaker source of stimulating the economy than the free market. [Proof] [...]

Jan 12, 2009 - 11:06 pm 36. Steve Selengut:

How To Stimulate Consumer Spending And Jumpstart The Economy

My survey produced an interesting anomaly— several respondents felt that excessive consumer spending was the primary cause of the economic problems we face today, and that spending is not to be encouraged.

But the root problem they were correctly speaking to is the source of the spending money, not the spending itself. Spending is essential for demand creation, and increasing demand is what produces jobs.

So why we ask, does government remove the dollars from the economy before they accomplish the demand stimulus “thingie” (highly technical economics jargon)? Nearly half the survey responses observed that consumption taxes (The Fair Tax) are far more productive/creative than income taxes.

The other half wants to replace the IRC (Internal Revenue Code) with a Flat Tax on all forms of income. Both suggestions are simple, and quantum leaps better than anything being seriously considered by congress— “seriously” being the operative word.

A combination of the two— priceless, but later!

The single, easiest, fastest, biggest, consumer-spending instant winner bonanza is not even a twinkle in an old politician’s eye— there are far too few new politicians. Replace the Social Security Retirement Program with a plain vanilla pension plan, pre-funded by smaller, mandated employee contributions.

The current methodology is simple: it takes money out of our pockets (and our employers) puts it though governmental blenders, and spits out IOUs for a meager benefit at retirement. Why not let the private sector provide pension benefits to all employees under the direction of a trimmed down Social Security bureaucracy?

How? By purchasing Social Security Retirement Income Annuities (SSRIAs). Google “A Capitalist’s Social Security Reform” for the nitty-gritty details, but here’s what we accomplish:

We stimulate spending immediately by only withdrawing 3% of income from 300 million pockets and pocketbooks, and nothing from employer treasuries. We provide demand-push spending money and reduce demand for consumer credit.

And, looking forward an article or two, we collect a tax on every dollar spent in the economy— except those for food, healthcare, and higher education; even from our friends and neighbors in the Underground and Internet economies.

There are several other ideas on the more-spending-money-in-consumer-pockets agenda, and some thoughts about consumer confidence. It’s tough to be confident, for example, when you click the links between congress and business lobbyists.

It’s tough to be confident when we see Wall Street control its regulators, constantly produce the same speculative garbage, and reward its senior employees and sales persons from the carcasses of mutilated shareholder-owners and “hostaged” taxpayers.

These confidence destroyers can be dealt with, but first the rest of the story, on increasing consumer spending without credit abuse:

One: Reduce the interest rate on all mortgages at least twenty-five basis points, and adjust monthly payments accordingly. The banks owe us, and will make-up the difference from increased business activity.

For the rest of the article, please google the title.

Steve Selengut
sanserve (at) aol.com
http://www.kiawahgolfinvestmentseminars.com
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”

Sep 18, 2009 - 12:40 pm

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