Tuesday, August 7, 2012

Government Economic 'Stimulus' as Economic Quackery

Whenever the government announces a "stimulus" program, it continually amazes me that hardly and mainstream economists in favor of such things aren't challenged as to where the money for such programs are going to come from. The money is either going to be printed up, which means new dollars are out there bidding up products against others holding dollars, who are out bid by those holding the new dollars. Or the money is taxed or borrowed away from others, meaning those from whom it is taken have less money to spend.

Thus, stimulus programs are worse than a wash and are really a negative, since instead of allowing a non-stimulus economic environment, a government stimulus program distorts and takes, in one form or another money from others, mostly by some form of coercion, and then runs it through the government bureaucracy and then doles it out to those who can influence government power centers. This folks is an anti-stimulus. anti-free market program

Economist Arthur Laffer took to the pages of the Wall Street Journal yesterday to make part of this very important point:
 If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).

Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a surefire recipe for less work, less output and more unemployment.

Yet the notion that additional spending is a "stimulus" and less spending is "austerity" is the norm just about everywhere. Without ever thinking where the money comes from, politicians and many economists believe additional government spending adds to aggregate demand. You'd think that single-entry accounting were the God's truth and that, for the government at least, every check written has no offsetting debit.

Well, the truth is that government spending does come with debits. For every additional government dollar spent there is an additional private dollar taken. All the stimulus to the spending recipients is matched on a dollar-for-dollar basis every minute of every day by a depressant placed on the people who pay for these transfers. Or as a student of the dismal science might say, the total income effects of additional government spending always sum to zero.

Meanwhile, what economists call the substitution or price effects of stimulus spending are negative for all parties. In other words, the transfer recipient has found a way to get paid without working, which makes not working more attractive, and the transfer payer gets paid less for working, again lowering incentives to work....

Stimulus advocates have a lot of explaining to do. Their massive spending programs have hurt the economy and left us with huge bills to pay. Not a very nice combination.

Sorry, Keynesians. There was no discernible two or three dollar multiplier effect from every dollar the government spent and borrowed. In reality, every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP.

The evidence here is extremely damaging to the case made by Mr. Obama and others that there is economic value to spending more money on infrastructure, education, unemployment insurance, food stamps, windmills and bailouts. Mr. Obama keeps saying that if only Congress would pass his second stimulus plan, unemployment would finally start to fall. That's an expensive leap of faith with no evidence to confirm it.


  1. Or in simpler terms, that old fellow anonymous--some say a Lakotah--said it best: "Only a white man would believe that you could cut a foot off the top of a blanket and sew it to the bottom of a blanket and have a longer blanket."

    In this case, however, he was only half correct.

    1. I like it (!) JMG. How about if I say it this way to someone:

      "Government stimulus is the same thing as cutting off the top part of a blanket and then sewing it onto the bottom of the blanket - and Then - think you have a longer blanket."

      ... they might even call it "reform" by flipping over the pattern.

      - clark

  2. I can't help it but Laffer is one of the most likable economists I know so far. Even in the "Peter Schiff was right" video when he vehemently disagreed with Schiff he was still likable...

    Didn't he even apologized later to Schiff personally and conceded that the he was so wrong?

  3. The fundamental undeniable fact of the universe is that human beings act but with very limited knowledge of each other's subjective values. Further, humans engage in voluntary cooperative economic exchange where each party believes he/she has improved her condition. There is no "equivalence" in such an exchange except for the approximate valuation given to the transaction by the use of money. Such transactions are often referred to as "spending" but that provides an incomplete picture because such a reference focuses only upon the buyer.

    The fundamental basis of the Keynesian worldview is to ignore the underlying fundamental reality of human exchange and to suggest, without basis in fact or theory, that the exchange process is analogous to physics. According to this "windup toddler toy model" of economics, the process of voluntary exchange allegedly requires an external source to provide it with "momentum" or "stimulus". The free actors left to themselves will allegedly not be able to generate the necessary "momentum" for the toy to spin to its full potential so that the process needs a source of ubiquitous external oversight in the form of the totalitarian-minded Keynesians to provide that "momentum". How convenient.

    Due either to stupidity or dishonesty (probably both), the Keynesians must always focus upon "spending" while insisting that two completely different phenomena, voluntary exchange and government "spending" are really the same thing. Not only that, but they insist that government "spending" can replace private "spending" in a positive manner. Not only that, but they insist that a lack of private spending suggests a lack of "momentum" which can be and must be provided by government "spending".

    In reality, the only thing that the creation of fiat funny money can functionally accomplish is to steal purchasing power from those holding the existing money to those getting the new money. It is likely that those getting the new money will probably "spend" it sooner than the real owners of the purchasing power would have, thereby making the dimwitted Keynesian think he has provided the necessary "momentum" to the "spending" process. The catastrophic secondary effect is to distort the pricing process, the information system necessary for informed economic calculation. The only thing that government "spending" can accomplish is to steal resources from others and [mis]direct those resources as the government chooses. Since the real owner of those resources was probably not "spending" in the present time as fast as the Keynesian deemed appropriate and while the government was "spending" in the present time, the dimwitted Keynesian can shout with joy that he has provided the necessary "momentum" (stimulus) to the "windup toddler toy" that is his "model" of free exchange. In reality, those resources have simply been misdirected, but the "spending" itself has distorted the price system and thus impaired informed economic calculation.

    Because the "economy" is not a windup toddler toy and does not possess or lack momentum, the entire Keynesian theory and worldview is preposterous.

    Naturally, the MMTers, Delong, and David Glasser, "FTC economist", mock Laffer while ignoring the fundamental problem of the Keynesian Hoax.


  4. Someone please explain to me why government spending is included in GDP?
    Consumption = production? WTF?
    What a rotten indicator of economic health.

    1. I wish I could, Capn Mike, but I can't. I've always thought the same thing in regards to GDP and how worthless of a number it has to be to have government spending included. I'm comforted (misery loves company) that there is someone else mystified by GDP.

    2. The "G" component(government spending) of the GDP calculation is a total fraud. You could have no productivity and show a "growth" by that equation via money printing.

      lol....I think I read someplace that Rothbard suggested a case for deducting it TWICE from GDP to get a real outlook on growth...I never read the specific argument though and I don't know which work of his it was in.

      I'm sure someone here can illuminate...I've a feeling Wenzel's read everything the man's ever published.

  5. That the stimulus is a net loser is irrelevant to those in power. The benefit is that when a stimulus program is implemented the rewards and loses are not distributed evenly. They know the right people will benefit and the sheep will be sheared again all the while blaming the capitalists for their pain. This will be used to garner more votes from the ill informed. Win Win for them.

  6. I can't help but think that Laffer is very good at "selling" economic policies to the people, but pretty bad at economics.

    The irony is that in this case he's selling the right policy too - stimulus spending IS a drag on the economy; but Laffer's data don't support it one bit.

    The data he provides show a) GDP growth, and b) government spending as a percentage of GDP in the same period. He notes that the numbers have a negative correlation - that's correct. What that should tell us is that:

    1. When GDP goes down, the same amount of government spending takes up a larger percentage of GDP.
    2. When GDP goes down, government apparatchiks tend to panic and increase spending even more.

    How he concludes from these data that government stimulus CAUSES lower GDP is truly a mystery :)

    1. I agree. At least it is another point that shows how people always interpret the data to suit their economic view. I agree Keynesians won't approve the data. They will simply assert that the stimulus wasn't big enough, that's all.

      What needs to be emphasized is not the data he shows, but the logical arguments he makes before.

  7. What is important to understand is that major universities seek economics professors who bring in a whole lot of cash. The Federal Reserve, the Treasury Department, and the various foundations (Rockefeller, Carnegie, Ford, ad nauseum) want people who are Keynesians. Moreover, the major universities turn out the people who become economics professor, and they don't recommend the ones who don't buy into the Keynesian paradigm.

    Just like the natural science departments don't get much funding unless they promote anthropogenic global warming. It's part of their assignment, to get the funding that major universities depend on.