This will be the first major battle that the administration will face, and the opponents are mobilizing: No Stimulus.
34 thoughts on “Drawing The Battle Lines”
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This will be the first major battle that the administration will face, and the opponents are mobilizing: No Stimulus.
Comments are closed.
The economic case for a stimulus is supported by economists from Paul Krugman to Martin Feldstein. The people opposing it either reject mainstream economics, or don’t want policies that might succeed politically for the Democrats. Neither rationale speaks well of those opponents.
Or else they’re savvy enough to know that in practice a ‘stimulus’ is going to be a larded-up power grab.
So Jim, are you suggesting that Tyler Cohen or Arnold Kling reject mainstream economics?
Krugman is one of the last Keynesians, and for good reason. Keynes was wrong, and his policies made the Depression worse. That opinion may not be Main Street, but it is Mainstream (within economics).
Krugman is far from a mainstream economist and those who worship him are likewise radical.
We have millions of people, who could be productive, sitting out of work; and we will soon have millions more. Aside from being a human tragedy, every day they remain out of work represents a waste of economic capacity. You can borrow money to put them back to work, or you can borrow money to run the government (including keeping the unemployed fed and healthy) without their contributions, but neither option is cheap.
Brock: I think you mean Tyler Cowen. And no, I don’t put Kling in the mainstream, any more than I’d put his favored presidential candidate (Ron Paul) there. “Keynes made the Depression worse” is politically motivated and amateur wishful thinking.
Jim, your idea of “minstream” economics has another name: command economics. Which suggests you are using a definition of “mainstream that is non-standard.
Even, dare I say, non-mainstream?
Jim, let us think this through a little bit.
You say the government can help by hiring people who are out of work. Really? To do what, exactly? Build bridges? Think again. Building bridges is no longer, since about 1850, a question of merely hacking down trees and throwing them over streams. It’s quite a sophisticated business, involving clever mechanical engineering design, high-tech materials, heavy construction using power equipment it takes years to master. How is your generic 33-year-old suddenly unemployed car salesman going to fit into this?
He’s not. In fact, there are almost no jobs the goverment can offer that everyone who’s out of work can fill except for pure unskilled labor. And there isn’t much demand for unskilled labor, is there? You don’t see many ads for Manual Laborer Wanted. No Education or Skills Necessary. Will Train.
Even if there was enough unskilled labor work to be done, what good will it do to have the unemployed car salesman doing it? So he gets a small paycheck. Big deal. Very few unemployed people are in danger of starving. What they need is not a few weeks or months of extra cash (which you could just give them, without this bullshit about hiring them to do make-work jobs). What unemployed people need is a new permanent job, possibly (if they’re in a contracting field) a whole new career.
There’s no way government can provide that. It can’t provide permanent new jobs, and it certain can’t provide whole new careers. Furthermore, every day an unemployed car salesman spends picking up trash or whatever in a government make-work job is a day he doesn’t spend doing what should be his top priority: finding a new, permanent job in private industry, possibly by retraining himself.
There’s only one thing a government “stimulus” is going to do. it’s going to send buckets of government cash to people who already have jobs, e.g. those in the road construction or solar-panel business, and artificially pump up the demand for their products and services. This will, of course, have the unexpected and obnoxious side effect of raising the price of those products and services for any private consumers. Brilliant!
I’ve read Keynes, and I’ve never figured out how government spending helps get us out of recessions since the government doesn’t have any money. It only has the power to tax and to borrow. Given inevitable inefficiencies, that’s a less-than-zero-sum game. You can target particular companies or sectors to have a temporary influx of resources, but in the long run, we have to lose.
(And, yes, I know what Keynes said about “in the long run.”)
If the government had Scrooge McDuck’s treasure room, and was going to dip into it to buy stuff… well, maybe. But they don’t, and they’re not.
Carl, why wouldn’t organizations which get stimulus money (directly, or indirectly, via contracts) either increase their hiring or at least refrain from lay offs?
Every dollar the government spends on ‘stimulus’ has to come from someone’s pocket somewhere, whether by taxes or by printing more money and devaluing the dollar. The first takes money that might have been spent productively. The latter has proven a disaster every time it’s been tried.
The proper ‘stimulus’ is to get out of the way and let business hire people and make a profit. Bleeding businesses in the name of fairness and equality is killing the economy.
And Carl, about the need for permanent jobs: Couldn’t a stimulus create surge in business activity which would create new long-term relationships between customers and suppliers?
Bob – we had a surge in housing because the government made home loans artificially low priced and easy to get. This inevitably led to the crash we are now experiencing. The government now says that the solution is to artificially raise demand for alternate energy, bridges, etc.
At the end of the day, they are causing the next crash – when all the alternate energy stuff goes bust. If they really did build bridges and roads, that would at least have a positive value at the end – but instead most of the money will subsidize alternate energy. So when the government realizes that it can no longer subsidize the world and stops subsidizing alternate energy, the cost of alternate energy will go back up.
Then a lot of energy producing companies will scratch their heads, and abandon the alternate energy plants for coal. The plants that the subsidies build will have zero value in the end, because it is more expensive to generate power using those methods!
You’ve got me there. I have no idea how people fooled themselves into getting mortgages they could easily lose. In my world, a long term relationship between the bank and home owner would have been created. I’m baffled. (And that’s why I don’t usually participate in discussions about economics!)
I’m strongly anti-stimulus myself. Lot of good arguments here that I agree with. In particular, I think David’s argument is particularly worth considering. We’ve been here before. Right after September 11, we were looking at the same sort of problems we face now.
Back then, Bush and Congress decided to open the money spigot. The end result is that we put off the recession for about eight years at the cost of several trillion in debt (for example, public debt increased by roughly $2.5 trillion from 2001 to 2008) and amplifying the effects of the current recession (for example, entire investment banking sector is gone).
I can’t say without knowing the technical details of the spending how the economy will fail next time, but David seems to have some good ideas there.
Further, the US isn’t the only country that has been here before. Japan had a nasty recession in 1990-1991 that they still haven’t recovered from. They went the route of massive construction projects funded by the postal savings system (their post office system doubles as a bank with interest rates the regular banks have trouble meeting). End result, weak companies linger, banks have trouble attracting savings, and the construction companies are oversized.
As I see it, a recession is a chance for society collectively to see what it has been doing wrong for the past few years and correct it. Interfering with that process to the point that no companies fail and no one loses their job just means that the circumstances will repeat in a few years. In the meantime, society doesn’t get the benefit of culling weak companies and move workers to more productive industries.
Even if the US has a sufficiently magical touch that the recessions never get worse and finances don’t weaken (neither being the case this time around), there’s still the matter of opportunity cost. All this effort to avoid pain costs us opportunities we’ll never see.
why wouldn’t organizations which get stimulus money (directly, or indirectly, via contracts) either increase their hiring or at least refrain from lay offs?
If you want a business to hire a person long term, you have to give them a long term solution to their money problems. A one-time cash infusion doesn’t do it. A permanant tax reduction does. When a company knows that it will have more money over several years, that can use that money to hire workers over several years. A one-time cash infusion is good for buying capital goods, while you cut recurring costs.
Look, half a trillion dollars has already been flushed into the economy. Banks were required to take the money, under terms set by the government. Several banks initially refused, but were given no option. So they took that money and bought other banks (capital). Then they cut the duplicate overhead (jobs).
Bingo. Hiring somebody isn’t a onetime expense, so the way to stimulate hiring can’t be a onetime thing either.
> Couldn’t a stimulus create surge in business activity which would create new long-term relationships between customers and suppliers?
The above shows a complete ignorance of relationships.
Long term relationships require long-term shared interests.
If I’m buying steel to build bridges, my “relationship” with steel suppliers lasts only as long as I’m building bridges.
> “Keynes made the Depression worse” is politically motivated and amateur wishful thinking.
Actually, it’s not. It’s generall accepted that the Great Depression was an exceptional event – it lasted far longer than previous depressions and the recovery was weak and intermittent. (We even fell into another depression.)
One of the important questions in Economics has been “Why was the Great Depression Great?”
The current answer is that FDR’s policies (which were actually extensions of Hoover’s) significantly extended the GD. FDR waged war on production, believing that the problem was oversupply. It wasn’t until WWII made that impossible that FDR took his foot off the brakes.
http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx
I was thinking of maintainance. You can get an investment to jump-start a relationship that one party can’t otherwise afford to start, but one that they can afford to maintain (usually, because maintainance takes lower cost, and occasionally, because it gives breathing room for some other income source can grow in the meantime). Think of the one-time infusion as activation energy.
A down-payment on a house is one example – many people can afford to maintain a house but can’t afford the downpayment. Similarly, roads and bridges need maintainance. For manufacturing, an injection of funding to create molds, dies, and other capital investments can jump-start a sustainable business. What am I missing?
One thing you are missing is what people do when given large sums of money.
What you are essentially saying is that forcing people to “build stuff” is good. What I am saying is that if you must force them to build it, it is almost certainly better to not be built. Whenever the government subsidizes something, it is forcing it to be built against the better judgment of its citizens – so there better be a pretty impressive reason.
Leland is right – hiring someone, especially with Democrats in power, is dangerous. In some states the obligation to pay employees is one of the few things that “pierce the corporate veil” – in other words, I invest $1M in my rocket company, hire a bunch of people, work for a year, then fold because sales don’t appear. Those workers then sue me personally for another years wages – and they win. I am now bankrupt – I was forced to risk more than my investment. This happens all the time in New York state.
Democrats pass these laws, especially in recession. I am actually the business owner in the aforementioned position (except I’ll have great sales, of course!) – I can tell you that I will not be hiring full time employees for exactly those reasons. Even if I received state funding, I know that the state funding will end (at any time of their choosing) but my risk will not end.
Small businesses started cutting back as soon as it was obvious Obama would win. To be completely honest, he is doing the worst thing possible by 1) leaving tax cuts in place now, and 2) promising to raise taxes later. That leads directly to 1) government goes further into debt, and 2) no new investment happens because it takes a few years before you see returns anyway, and you know those will be taxed.
Frankly, the idiocy of these people astounds me.
After the current mess we’re in, I thought it would be self-evident that you can’t borrow your way to prosperity.
Likewise, if they’re unable to borrow at such low interest rates, they’re simply going to print more money. There are many cases in economic history (see Weimar Republic and much of South America and Africa) of what happens when the government massively increases the money supply. The outcome can easily fall into hyper-inflation with rates of several hundred to thousands of percent.
Bob, a business that gets “stimulus” money from the government, for example a contractor hired to build 100 miles of highway for which there is at present insufficient demand to convince local taxpayers to pay for it, will certainly hire construction workers — as long as the government money lasts. When the money runs out, the workers are out of a job once again. It’s not permanent.
You have only to look at the historical record after wars, in which the government hugely ramps up its spending. After the war, there is almost always a significant recession, as the government spending drops and those employed to meet the government’s demand for products and services lose their jobs.
But it’s worse than that. The recession that follows a war is typically worse than you’d have if there was no war at all. That’s because the government demand has distorted the long-term choices people make. For example, someone entering the work force at age 18 in 1942 might have taken one of those great war jobs at GM making heavy tanks. Three years later, the government doesn’t need tanks any more, and he loses his job. However, the important thing is not that he’s, once again, out of work, but that he’s lost three fully years getting started on a real permanent career. He’s now 21, maybe married with a family, and all he knows how to do is build tanks, for which there is zero permanent demand. He’s still got to get started building a regular career, deciding what he wants to do, finding the right employer, getting the education he needs, et cetera. But he’s wasted three precious years, thanks to the government “stimulus.”
Look at it this way. Suppose your kid, age 18, has just graduated public high school, age 18. He’s got no skills, and his education kinda sucked, and he’s been goofing off a lot with his buddies and girlfriend anyway, not really paying attention to the problem. This is exactly the kind of person who forms the bulk of those who become unemployed in a recession. Those with the least skills, the least seniority, the least education and least motivated and sensible are most likely to be laid off or fired.
You realize that the kid needs to do a lot of work. He’s got to get serious about finding a career, maybe take some classes, maybe get rid of the cell phone to save up some money, maybe move somewhere else where the job he wants and is good at is located.
Would it be a great idea for you to give him two years’ salary instead, doing some random job for which he would not, aside from your money, ordinarily be hired? Or do you think that just delays the inevitable, and in a dangerous way, because he’s not getting any younger, and the sooner the job (of finding a career) is started, the sooner it’s finished?
That’s the situation. If the kid is starving, sure, make him a cash loan to tide him over. But if the problem is that he needs a new career, giving him random money is no kindness. Right now, we have dislocations in the economy because a lot of people were in the wrong jobs. Too many in house construction and mortgage brokering, for example. These people have lost their jobs because the demand for their services or products is no longer there. Government can’t change that fact o’ life. So the sooner these folks get moving on a new career, the better. Government is not going to help by delaying that change. Might as well subsidize buggy whip manufacturers when the automobile was invented.
Government can help — by reducing the burden, particularly of taxes, on companies and industries that are trying to grow — to hire people. But, you know, that would involve giving tax breaks to people with capital, i.e. “rich” people. That can’t be done, because as we all know since November, if you have 10 million rich people that’s evil, while if you have only 1 super-rich Uncle Sam, who does all the hiring and firing, that’s good. Whatever.
I was thinking of maintainance. You can get an investment to jump-start a relationship that one party can’t otherwise afford to start, but one that they can afford to maintain (usually, because maintainance takes lower cost, and occasionally, because it gives breathing room for some other income source can grow in the meantime). Think of the one-time infusion as activation energy.
B ob, this is an excellent description of the role of capital in the modern economy. You are exactly right! And how does the government increase the supply of capital?
By reducing the amount it takes away from people, of course. Government stimulus destroys capital (by taxing it away) and turns it into wages. But more wages is not what we need! We need capital, the “activation energy” to get things moving. That is the essential folly of “stimulus” spending. It’s not a stimulus at all, it’s the very opposite. It’s eating your seed corn.
Carl, I’m going to reread what you wrote more carefully later, but my first reaction to what you wrote is that this is why we gave money to the finance industry — to encourage them to make loans when they otherwise wouldn’t, so that that people could afford to make capital investments.
Also, I don’t see why giving money directly to Joe’s neighborhood solar-R-Us is equivlalent to turning capital into wages. Why can’t Joe use the stimulus money he receives to make capital investments? Will the stimulus specify “must be used for jobs” or can it be spent on capital? I understand that the stimulus needs to come _from_ wages *eventually*, but why does it have to go _to_ wages immediately? (Actually, I don’t see why it has to come from wages – why can’t the Federal government be in the business of making money?)
Yeah, I know that was the argument, Bob. But…c’mon, you don’t really just take a politician at his word, do you? You’re not that young and starry-eyed, I hope?
Money was given to the banks to prevent them from failing, i.e. in order to save the jobs of the people involved. It went to wages, you can be sure. Ideally, when people were no longer freaked by the possibility of losing their jobs, they would start making more rational business decisions, and the presumption here is that the rational business decision is to lend more money. That it is, in essence, just a panic among bank employees about losing their jobs that is preventing them from making loans. An interesting — and entirely unverified, even implausible — assumption. A more reasonable assumption might be that people stopped making loans because it was rational to do so, because time was needed to pull money out of stupid bubble investments and find wiser investments for it. In which case, encouraging — even forcing — people to continue the same lending habits would just be throwing good money after bad. But I digress.
I think we’re getting confused about the nature of “capital.” Capital is by definition money you don’t need to meet immediate needs. It’s extra, surplus, filed under Miscellaneous, not otherwise earmarked — pure Scrooge McDuck wealth. It’s only this stuff that can be invested, i.e. put to some brand new use, doing something you’ve never done before. You can use it to buy a house, to hire somebody, to start a business, to get a college degree. But the point is, in order for this money to be “capital” it has to be money you don’t need just to stay afloat, it has to be wealth you can put to some new use. This is the nasty practical joke God has played on the collectivists in their fantasy Eden. The exact apple they hate — pure capital, pure un-needed wealth — is the only thing that will keep them alive. If they won’t bite it, they won’t survive.
Yes, you’re right that Joe could use his “stimulus” money as capital, but, well, he’s not likely to get any stimulus money if he’s likely to do that, and the politicians find out. What the stimulus is supposed to do is “create jobs,” right? That means the politicians are going to do their best to make sure that whoever gets it immediately forks it out in wages. They sure don’t want Joe salting it away in the bank so that he can use it later to expand business, diversify by buying Sally’s Cow Methane Works, et cetera. That wouldn’t look good at election time — that’s just giving more money to “the rich.”
But let’s say Joe does salt the money away, i.e. he uses it as capital, while Sally spends it on wages, as Congress intended, so that the stimulus is at least 50% capital, if 50% spent as wages. The problem is now where it came from. Where did it come from? Well, remember, we can’t increase taxes on the “working poor,” right? So the money came from people who could “afford to pay” — that is, we stole the capital — wealth not otherwise earmarked! — from “the rich.” So the stimulus comes nearly 100% from capital but goes at best 50% back into private capital, with the rest into wages.
In essence, the government “stimulus” converts $x trillion of private capital into a smaller amount of private capital, with the balance going to private wages and (aha!) a certain nontrivial fraction being skimmed off to pay government wages, of those very necessary public servants who determine where the money flows.
Since you’ve converted $x trillion of capital into (say) $x/2 trillion, this is utterly the reverse of the concept of a “stimulus,” where you supply a small activation energy that releases a large amount of pent-up energy. In this case, government is taking what activation energy already exists and converting it into heat and motion and activity, reducing the real activating that can get done. As I said, it’s eating your seed corn.
I’m sure the economy will survive, of course. You can eat your seed corn, provided you don’t eat all of it. It’s not fatal. But it always lengthens the lean times, and I’m certain that’s what this goverment “stimulus” will do.
You look at capital as “salting it away”. I’m not saying you’re wrong (this is among the first economic discussions I’ve ever attempted!), but I think of it in terms of buying molds and dies (either literally or metaphorically). I think of the mold as a capital investment. If I buy a mold, I give business to a mold maker, but more importantly, I can start making a new product, which leads to growth and eventually maybe I can hire another worker. I suppose you agree with all that and I’ve told you nothing, but I can’t reconcile that sort of activity with “salting it away”.
PS I appreciate your comments very much and I confess I’m multitasking. I’ll slow down and read everything you’ve written again more slowly.
A down-payment on a house is one example – many people can afford to maintain a house but can’t afford the downpayment.
Good grief, the lessons of the Housing Bubble apparently weren’t learned.
I suspect maintenance means paying the monthly rate, but oddly enough maintenance, that is fixing the house, is the point of a downpayment. Leases require security deposits. Mortgages require a downpayment. The point is to build personal stake in the investment.
Lets look at Rand’s bee infestation. The bees didn’t threaten Rand, they threatened the people living in his rental property. Why didn’t the people threatened pay for removal of the bees? Because the property isn’t their’s. They own the furniture and other stuff, but the home wasn’t their’s, and they could simply move to another home, because they had no investment to lose.
Rand, on the other hand, had skin in the game. He had made a downpayment (maybe owns the home by now), and he doesn’t want to lose his investment. This motivates Rand to do something about the bees. So he takes the time to find contractors, request bids, hire the best bid, evaluate their work, and pay them. His action protects his personal investment in the home, and allows it to retain its value.
A person, that doesn’t put a personal stake in a home via a downpayment, is simply a renter. They are making monthly payments that are required. They want a comfortable life, but if something goes awry that was unexpected, they move. This happens often, because a person who is unable to save for a downpayment is also unable to save for an unintended event. They are typically unable to maintain the home. When that happens, they move out of the home, and the homes value falls.
I know. I meant repairing the house, replacing appliances as needed, paying property taxes, repaving the driveway, and other irregular but inevitable expenses, as well as any mortgage payment. I should have stuck to molds and dies for a business as my example.
> why we gave money to the finance industry — to encourage them to make loans when they otherwise wouldn’t
Since that was a mistake, using it doesn’t improve your argument. Instead, it’s even more evidence that govt intervention is a bad idea.
> I should have stuck to molds and dies for a business as my example.
It doesn’t help.
Govt can’t create the money that you propose giving to the mold maker. It can only take it away from someone who had chosen to not make molds. (Or, was going to make molds, but hadn’t given money to the relevant politicians.)
What are the odds that govt’s decision to fund mold making will have a better outcome than whatever the person would have done otherwise?
Of course, if Bob thinks that govt makes better decisions, let’s have a vote to divide up Bob’s stuff. Surely he trusts us at least as much as he trusts Nancy Pelosi.
Andy, I’m not arguing for the stimulus; I’m trying to understand the arguments against the stimulus. You provided an argument against taxes in general, as well as against a command economy. But taxes won’t be abolished and a command economy won’t be installed.
So lets look at the actual stimulus plan. See the article in today’s washington post called “Obama Presents Further Details on Economic Stimulus” (I won’t link because then Rand will have to approve the post, but you can easily find the article on the web).
Here are some elements, cut and pasted from today’s Washington Post.
$275 billion in tax cuts (via the congressional plan, everything below is from the President’s plan)
$41 billion in tax relief for small businesses
Laying more than 3,000 miles of transmission lines
Enhancing security of 90 major ports
Modernizing the nation’s water system by launching 1,300 wastewater projects, 380 drinking water projects and 1,000 rural and sewer system projects.
Renovating 10,000 schools
Tripling the number of undergraduate and graduate fellowships in science
What are the arguments against the above?
Bob, that’s $300B of an over $1T plan – and it appears to be the handpicked parts that we would like!
But, I’ll give you a for instance:
The tax cuts are not tax cuts – they are tax credits. The difference: a tax cut is where the government says “I’m not taking as much of your money any more”. A tax credit is where the government says “If you do what I want I’ll not take as much of your money anymore.” See the difference?
The tax credits are a subsidy – a market distortion. Sometimes the market needs to be distorted – by that requires a burden of proof not met by the current plan. For example, my small business might receive a $3,000 tax credit for hiring someone. If I work in a company that uses cheap labor, my cheap labor just got even cheaper. And my competition? Oh they use expensive, skilled labor – there stuff is higher quality, but neither of us would normally massively outcompete the other.
But now the government has distorted the labor market – my cheap labor is now %15 cheaper than before. I lower my price by %10, and completely destroy my competition – who all lose their jobs, of course, but that’s OK, they can always work as cheap labor for me!
So by giving a $3K per new hire tax credit, the government is subsidizing low quality work at teh expense of high quality work.
Does that explain it to you? (That is a real part of the package, last I heard)
Um, I noted that I did not clearly explain the difference:
a $20K/yr employee that gives me a $3K credit is 15% cheaper
a $100k/yr employee that gives me a $3K credit is 3% cheaper
Thus, there is a net subsidy of minimum wage employers, at the expense of the companies that actually pay their employees a “livable wage.”