Paul Krugman explains why some temporary spending hikes (such as unemployment insurance) can boost demand in a way that some tax cuts (e.g., for "the rich") cannot.
It's Christmas in August for me, since I had been railing about this very point recently. My theme was that a payroll tax cut ought to be roughly as stimulative as an increase in unemployment insurance. And today, Krugman clarifies his opposition to tax cuts a bit:
That’s why unemployment benefits are an effective demand stimulus: the unemployed are highly likely to be suffering a temporary income loss but be unable to borrow cheaply. It’s also why tax cuts for working-class families may have some traction: a fair proportion of those families will be people having a bad year, but without assets or borrowing capacity to draw on.
But temporary tax cuts for people with high incomes are likely to be highly ineffective: there are people with incomes over $250,000 who are having a temporary bad time and have neither assets to sell nor the ability to borrow, but they’re very much the exceptions to the rule.
We seem to agree that both unemployment insurance and payroll tax cuts will mostly be spent rather than saved, which is progress. I have no problem imagining that tax cuts for "the rich" are mostly saved, but I am less sure about why I care - the decreased public saving is offset by increased private saving, so the savings/interest rate feedback loop is not activated.
Now, if there was some other constraint on the size of the stimulus package (rather than on the size of the net increase in public and private borrowing), tax cuts for "the rich" would not provide as much apparent bang for the buck. And in the current political environment, I think the political/optical constraint is real, sensible or not.
As to Krugman's position on payroll tax cuts, he has had different but not irreconciliable positions. This is from a Jan 6, 2009 blog post:
How much do tax cuts and spending raise GDP? The widely cited estimates of Mark Zandi of Economy.com indicate a multiplier of around 1.5 for spending, with widely varying estimates for tax cuts. Payroll tax cuts, which make up about half the Obama proposal, are pretty good, with a multiplier of 1.29; business tax cuts, which make up the rest, are much less effective.
But a few days later, payroll tax cuts didn't make the cut in his Jan 11 2009 column:
First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise.
Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more. And why not get an early start on the insurance subsidies — probably running at $100 billion or more per year — that will be essential if we’re going to achieve universal health care?
Within five days payroll tax cuts went from "pretty good, with a multiplier of 1.29", to "ineffective". Hmm.
If I believed that (a) all public spending had a multiplier of 1.5 (despite a possible dearth of shovel ready projects); (b) that the payroll tax cut multiplier was "only" 1.29; and (c) that my total stimulus package was subject to some numerical bound regardless of the mix of tax cuts and spending, then I might drop the tax cuts as less effective. But ineffective?
But don't let me start whining! Since payroll tax cuts have now made it back to being possibly effective, I will settle for the progress made so far.
when you start with a solution as Krugman always does you'll hurt yourself trying to twist the problems into knots to make them fit that solution ...
effective solutions are easy once you discover the actual problems ...
when you start with a solution it is almost impossible to discover the real problems ...
Posted by: Jeff | August 09, 2010 at 02:58 PM
Hey .. even a stopped clock is right twice a day.
Posted by: Neo | August 09, 2010 at 03:07 PM
.. so what is Krugman's excuse ?
Posted by: Neo | August 09, 2010 at 03:08 PM
I can see Krugman now .. like a scene out of "RoadRunner" ...
Paul Krugman .. .. super genius.
Paul Krugman .. super genius.
Beep beep !!
Posted by: Neo | August 09, 2010 at 03:12 PM
Life in Krugman's Mind:
Spending hikes place the spending power in the hands of Government, therefore they are good.
Tax cuts place power in the hands of taxpayers, therefore they are bad.
Any questions?
Posted by: Georg Felis | August 09, 2010 at 03:17 PM
Laffer put in his 2 cents last week.
http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748703977004575393882112674598.html
Posted by: MikeS | August 09, 2010 at 03:21 PM
If you go to RCP, it is quite obvious what the Journo-List talking points were in this weekends directive from the West Wing.
Krugman is just one of many leftist voices (The New Yorker, the Atlantic, USA Today) pushing not only to leave the expiration of the Bush cuts alone, but to raise taxes further.
They can the List off of the Net, but you can't take the Journo off the list.
Posted by: matt | August 09, 2010 at 03:26 PM
So tell me, why shouldn't people who receive unemployment insurance work for what they receive?
Call it a "temporary government job" so they'll not feel bad about taking a government handout.
Certainly no public employee union could squawk because it would be good for the economy and good for the country.
Posted by: sbw | August 09, 2010 at 03:26 PM
Is it true Krugman has a poster of Keynes on the ceiling of his bedroom? I'm sure the good professor has collected all the JM Keynes action figures. (The kung fu grip is especially helpful boosting aggregate demand!)
Posted by: lyle | August 09, 2010 at 03:31 PM
True, Matt, the Journolist like Parkay, not butter but real close
Posted by: narciso | August 09, 2010 at 03:33 PM
Ah. I think I get it. According to Krugman there is no such thing as supply side. In his view a tax cut for the rich is more likely to saved than unemployment for the poor which is more likely to be spent. So in the Krugman world view the tax cut cash goes into the bank where it sits in vault until the rich guy decides to pull it out to buy a yacht or something. Is that how he thinks it works?
What about that bit about the reserve requirement multiplier where a $10,000 deposit becomes $100,000 when it's loaned out to home buyers and businesses? Passe now?
Posted by: Tom Bowler | August 09, 2010 at 03:49 PM
Notice that Krugman refers to "temporary" tax cuts for the rich as being ineffective. My suspicion is that Krugman fully understands that permanent marginal rate reductions would be a positive factor for the economy, but, as a social policy matter, he has decided to be a propaganda organ for the progs.
Posted by: Thomas Collins | August 09, 2010 at 03:57 PM
Krugman... Krugman...
Enron adviser, right?
Posted by: Rob Crawford | August 09, 2010 at 04:18 PM
Please forgive some light editing, TC.
Posted by: lyle | August 09, 2010 at 04:18 PM
I must concede, lyle, that I might have been giving Krugman too much credit by assuming he is anything other than a knee jerk prog. And feel free to edit out my "might have been" and insert "clearly was"!
Posted by: Thomas Collins | August 09, 2010 at 04:42 PM
--Is it true Krugman has a poster of Keynes on the ceiling of his bedroom?--
Maybe, I don't even want to think about it, but even Keynes would probably not endorse higher taxes now. To a real Keynesian tax increases lower aggregate demand.
What we have now are people who use Keynes' name to advance their own peculiar economic theory which is that at all times and in all circumstances tax increases and higher spending are salutary.
One can only conclude their long term objective is socialism but you dare not say it to their face.
Posted by: Ignatz | August 09, 2010 at 04:47 PM
"I have no problem imagining that tax cuts for "the rich" are mostly saved..."
If the definition of rich is annual income over $250k, then I guess our household is "rich" (just not a quite as a year ago due to switching from full time to part time). I can't recall if I spent more or saved more when marginal rates were cut, but I can tell with the upcoming state income tax increases and possible federal income tax increases, our incremental tax hit will be between $10k - $15k annually and I am looking for ways to cut spending by that amount (not reduce savings). I have already switcher to a cheaper internet service, cell phone service and I am canceling home phone service (trying out VOIP combined with cell phone). That's about $1k. Now I need to find another $14k (cheaper food, cut charitable giving, cut dinner out, put off new PC purchase, cut cable, put off new car purchase, lower clothes spending). I will find a way to cut spending to offset higher taxes.
Posted by: Richy Rich | August 09, 2010 at 05:00 PM
Krugman is right that people receiving unemployment benefits will spend a larger percentage (100%) than will those receiving tax cuts (something less than 100% of the money, some will be saved)...
.. but he is wrong in that the critical factor in boosting the economy isn't the percentage of money that gets spent by group A or group B, but rather the effect that has on the economy as a whole.
If, as I believe, people aren't going to increase their spending and businesses aren't going to start hiring because unemployment benefits are extended, then extending benefits will have no positive impact on the economy (as is the case with the Democrats' stimulus as a whole; the public was woefully unimpressed and thus sat on their hands).
To be fair, the same question needs to be asked of tax cuts: will people react to them in a positive way? The answer is likely to be no, at least if the cuts are viewed as temporary, a business isn't going to hire someone only if they expect to have to reduce staff as soon as the tax cuts lapse. On the other hand, a permanent reduction in tax rates will be seen by the public as a whole as a positive.
Posted by: steve | August 09, 2010 at 05:30 PM
This isn't an economic issue; it's a moral one. That's why people like Krugman can change their arguments on a dime: because they never change the end result. The economy has nothing to do with it. It's either morally just for the government to take what they want and leave you the rest, or it isn't.
To a progressive/collectivist/statist like Krugman, the rich must be taxed heavily. Anything else would be unjust. To everyone else, it's not the government's money.
It doesn't matter how the tax receipts are affected. It's a matter of social justice.
Posted by: Extraneus | August 09, 2010 at 05:56 PM
It's a matter of
social justicetheft.There, all better now.
Richy - try a $0 based budget with careful attention to distinguishing need from want. Shoot for $2K a month and start today. That way you'll be able to blow $30K on a Sarah Palin Inaugural Celebration vacation.
Posted by: Rick Ballard | August 09, 2010 at 06:08 PM
That way you'll be able to blow $30K on a Sarah Palin Inaugural Celebration vacation.
Heh. I've been limiting my spending, too, but I'd blow a bundle on that party.
Posted by: Extraneus | August 09, 2010 at 06:28 PM
" Now I need to find another $14k"
Just a thought, there are tax free states.
Posted by: Pagar | August 09, 2010 at 06:37 PM
" It's either morally just for the government to take what they want and leave you the rest, or it isn't."
My guess would be Not.
"A Bolivian court has upheld a government decision to seize a ranch from a U.S. cattleman and his family on the grounds they treated workers as virtual slaves, an official announced Monday"
I don't think we are as far as many people think from this type of of government here.
Posted by: Pagar | August 09, 2010 at 06:50 PM
Did everyone read the top link at Drudge yet? I saw it before the story link was changed, and Drudge had a big pic of the guy, which isn't even in the story now. (Never realized how quick they work on a breaking story.) Here he is and here's the original link:
Posted by: Extraneus | August 09, 2010 at 06:50 PM
He was found at home in a "sexual embrace" with his "partner." Hmmmm....
Countdown to homophobe charges against the passengers and Jetblue in 3, 2...
Posted by: Stephanie | August 09, 2010 at 06:56 PM
Wonder if they'll charge the passenger, who apparently committed the first crime.
Posted by: Extraneus | August 09, 2010 at 07:06 PM
All he would have had to do is say, "I told you to sit down. Now I'll have the police waiting for you at the door."
But noooo.
Posted by: Extraneus | August 09, 2010 at 07:18 PM
but even Keynes would probably not endorse higher taxes now. To a real Keynesian tax increases lower aggregate demand.
What we have now are people who use Keynes' name to advance their own peculiar economic theory which is that at all times and in all circumstances tax increases and higher spending are salutary.
I don't know if it was part of the "Free to Choose" series or something subsequent, but I heard Milton Friedman discuss Keynes as (iirc) a brilliant man whose works were almost completely misunderstood by people that claimed to be his acolytes.
Posted by: Captain Hate | August 09, 2010 at 07:19 PM
I read a review of Skidelsky's bio of Keynes in the Spectator, sometime in the late 90s, that made the same argument. One should recall
that Hayek was rebelling more against the 'historicist' Austrian school of development
rather than strickly Keynes
Posted by: narciso | August 09, 2010 at 07:28 PM
Enron adviser, right?
Right!
TM knows we absolutely, positively cannot get too much of Paul Krugman, former Enron advisor.
Posted by: PD | August 09, 2010 at 07:35 PM
Extraneous opines: ``This isn't an economic issue; it's a moral one."
Which is exactly why there is no point in discussing tax economics with identity conservatives. Their agenda is to defund government, not to balance the budget or achieve economic growth. They see taxes as theft, so whatever points they may try to make about maximizing revenue or stimulus mere intellectual dishonesty. The honest identity conservative simply admits his agenda is to defund government and proceeds to defend that position.
Posted by: bunkerbuster | August 09, 2010 at 07:42 PM
Inaugural Celebration vacation?
Government employees are the rich ones. The ones checking in the salvation army are willing to sacrifice for them.
Posted by: Sfir | August 09, 2010 at 07:45 PM
No. Really. I mean it.
Can someone explain to me why people receiving money from the government while they are unemployed should not work for the income they receive?
Posted by: sbw | August 09, 2010 at 08:03 PM
sbw asks: ``why people receiving money from the government while they are unemployed should not work for the income they receive?''
The unemployed did work for the money. That's why its called unemployment insurance and that's why you can only get it if you were previously working and, even then, only if you paid in. Moreover, your benefit is commensurate to your payments. Should I be surprised you're unaware of this? Somehow, I'm not...
Posted by: bunkerbuster | August 09, 2010 at 08:07 PM
--That's why its called unemployment insurance and that's why you can only get it if you were previously working and, even then, only if you paid in. Moreover, your benefit is commensurate to your payments. Should I be surprised you're unaware of this?--
Should we be surprised that you don't mention that extended benefits are in fact not from what an employee paid in but are a specially appropriated form of federal welfare once a person's actual unemployment benefits expire?
I'd say you're merely unaware of this but you have proven yourself a particularly dishonest person so no longer give you the benefit of the doubt.
Posted by: Ignatz | August 09, 2010 at 08:19 PM
SBW,
They purchased insurance for 26 weeks. Beyond that point it's welfare. There is no reason not to require work but I question the benefit. I'd rather see the welfare tapered off at 5% per week.
Robert Barro places the efficacy of the current idiocy at .6 rather than a hash pipe fantasy of 1.5. He's never gonna get a membership card in the Ivy League Lemming Club saying things like that.
Posted by: Rick Ballard | August 09, 2010 at 08:25 PM
Ig: the benefits are extended, but as you acknowledge, they are benefits linked to the existing insurance policy that was paid for by the employees. Again, they paid and their benefit is commensurate to their payment. If a private insurance company increases their payout for, say, knee surgery, they wouldn't require policyholders who receive the expanded benefit to pay additional premiums, would they? If you want to be honest, just say you think the benefits are too generous, given what the workers paid in. But don't tr to pretend these benefits are going to people who didn't work for them, because that's totally dishonest. If you didn't pay unemployment insurance, you won't get the benefit.
Posted by: bunkerbuster | August 09, 2010 at 08:27 PM
--If a private insurance company increases their payout for, say, knee surgery, they wouldn't require policyholders who receive the expanded benefit to pay additional premiums, would they?--
Not sure why I waste my time with your inanities but a valid analogy, unlike that idiocy of yours above, would be a federal welfare program which kicked in after a private insurance policy ran out. That's welfare. It might only go to those who paid into a private insurance policy previously, but it's still welfare.
Posted by: Ignatz | August 09, 2010 at 08:35 PM
I'm pretty sure it's employers that pay for unemployment insurance.
Posted by: Captain Hate | August 09, 2010 at 08:36 PM
CH -- Yup. It is part of the employer's side of payroll taxes.
Posted by: DrJ | August 09, 2010 at 08:39 PM
Dunno how accurate it is but did find this ...
Posted by: boris | August 09, 2010 at 08:50 PM
is it me, or do the Democrats seem to be becoming ever more deranged every day? Now Taranto is mentioning that many Dems want to blame Biden and nominate Hillary as VP for the next election. That Obama may not even be the Dems candidate at that popnt doesn't seem to enter into the equation.
The mid-term strategy seems to be "don't say a word about the legislation we just rammed down the public's throat" with a healthy dose of "Blame Bush". That and portraying their opponents as bat-sh*t crazy.
Already they are pulling out every smear tactic they can find in their moth eaten bags.
Rangel is already waving the racist card, while we can expect the same from Maxine Waters. In the meantime, the Republicans have to get in touch with their inner grownups.
Posted by: matt | August 09, 2010 at 08:54 PM
The Republicans are balking and want the benefits to be deficit neutral by paying for it with last year's unspent stimulus money.
I hope the Repubs don't go wobbly on this, although their spines have suffered a calcium deficiency in similar previous circumstances. In view of how Paulie the K talks about what a boost to the economy unemployment insurance is, what reason could be given for not spending the unspent stimulus money on it?
Posted by: Captain Hate | August 09, 2010 at 09:07 PM
Too late 60-40
Posted by: boris | August 09, 2010 at 09:09 PM
I doubt whether bunkerbuster has ever been an employer; otherwise he'd know that. Further, any time a laid-off employee files for unemployment insurance and receives it, the rate the employer pays on his remaining employees increases. That's why I fought vigorously the claim of the one former employee who tried to collect. He quit voluntarily to move to another state, then claimed he'd been laid off. Nice fella otherwise, but I didn't love him enough to bear the burden of the increased insurance rates for all others who worked for me.
Posted by: (Another) Barbara | August 09, 2010 at 09:16 PM
60/40; I'm guessing the Me. (as in menopausal) twins caved and Les Nessman gave one of the gelded blue dogs permission to vote its conscience, for lack of a more descriptive term.
Posted by: Captain Hate | August 09, 2010 at 09:31 PM
Ryan replies.
Posted by: Jim Ryan | August 09, 2010 at 09:41 PM
OT
Karl Rove mentioned this poll today on RUSH. Read about it at Politico: Crossroads poll: Dem Senate in peril
Posted by: Ann Mongrel | August 09, 2010 at 10:02 PM
The dummy who keeps posting, who thinks he's a war hero, doesn't understand the simple methods of insurance. The statistical chance of one subscriber to have the need for knee surgery is represented in the Poisson distribution that is life. The cost for that happening is spread across all members of the population. The more the Knee replacement happens, the more that cost is fed into the distribution.
Unless, of course, you work for a public union or state run educational institution, where this might be a bit distorted, because of the injection of other people's money.
Posted by: Melinda Romanoff | August 09, 2010 at 11:13 PM
The truth is that nobody really knows how well spending or tax cuts are going to work ahead of time. There is some inconsistency in how well they have worked in the past.
What we do know for sure is that the Obama 'stimulus' did not perform well. The results, so far, have been worse than even the pessimistic estimates of a year and a half ago.
Posted by: MikeS | August 09, 2010 at 11:29 PM
Lemme axe you: is the toe-sucker Dick Morris out of his mind in his 2010 election predictions? He's confidentlty forecasting an outcome that could force your sensible, reserved Danube to get up and strut. Can this really happen?
Posted by: Danube of Thought | August 10, 2010 at 12:56 AM
Bunkerbuster:
I would refer you to this excellent article--Why I'm Not Hiring
Posted by: glasater | August 10, 2010 at 03:30 AM
In an earlier thread the point was made to me that even though the head of the Federal Reserve is appointed by the president, the Federal Bank is not controlled at all by the president. In view of that, I find it an odd coincidence that the Fed is going to be turning on the taps again, just in time to temporarily ease the economy just before the November election. Where are the Chinese walls?
Posted by: Chubby | August 10, 2010 at 04:57 AM
Good Morning to all!
Looks like another beautiful day.
Posted by: Pagar | August 10, 2010 at 07:45 AM
I got an email from Soylent AND An APO address which I am sending to Janet.
He certainly hasn't lost his sense of humor, and since I do not have permission to post his email I'll just give you this part as a true Soylent teaser:
I was cheerfully sleeping in (having not yet been assigned to an actual job) when I heard the air raid sirens go off. Since I’ve never heard the air raid sirens before, I naturally thought to myself, “I wonder if those are the air raid sirens…”
Once I had determined what was going on, I got dressed and pulled out my helmet and body armor and walked off to work, because that’s what you’re supposed to do. Once I got there, everybody was working and ignoring the subsequent sirens and warnings (we have a nice automated British woman who tells us things like “Rocket…a-TECK” and “MESS…Casualties”. Might be the same woman who once told me to “Mind the gap.”)
Posted by: Jane | August 10, 2010 at 07:53 AM
Morning all. The early shift is on duty.
Posted by: Extraneus | August 10, 2010 at 08:46 AM
Chubby,
It doesn't matter a whit whether Uncle Ben leads the FOMC in a stirring rendition of the Battle Hymn of the Republic or they all jump into a clown car and drive over a cliff wrt the November elections. The market may react but the economy - the people of the United States - ain't gonna budge a millimeter based upon the decisions of a group which is no better informed than was Christine Romer when she trotted out the chart which effectively finished her career in DC.
It's horrifyingly amusing to watch the "best and the brightest" push the buttons and pull the levers with increasing frenzy but the American people are voting their absolute lack of confidence every damned day and they will continue to do so until DC is properly fumigated.
Posted by: Rick Ballard | August 10, 2010 at 09:39 AM
CH -- Yup. It is part of the employer's side of payroll taxes.
Which just means it's part of the cost of employing someone. Theoretically, if the gubmint didn't pocket it, the employee could.
Posted by: Rob Crawford | August 10, 2010 at 09:57 AM
It's horrifyingly amusing to watch the "best and the brightest" push the buttons and pull the levers with increasing frenzy...
When I was a kid, there was a shoe store that had the entire dashboard of a car dismantled and installed in their store. You could sit in a chair, play with the steering wheel, the shifter, all the knobs and levers -- the only thing wired up were the turn signal indicator lights. We kids knew it wasn't doing anything, but we had fun playing with the controls.
I wonder when the "best and the brightest" will learn all those knobs and levers aren't really attached to anything...
Posted by: Rob Crawford | August 10, 2010 at 10:01 AM
--In view of that, I find it an odd coincidence that the Fed is going to be turning on the taps again, just in time to temporarily ease the economy just before the November election.--
Chub,
The ten year rate is below 3%, which is right about where it was in mid 2008 and we know how effective those rates were at keeping the economy afloat.
The problem facing the economy is not a monetary one so there is little the fed can do at this point.
It's a fiscal and political one; taxes, spending and regulation.
Posted by: Ignatz | August 10, 2010 at 10:04 AM
The problem facing the economy is not a monetary one so there is little the fed can do at this point.
It's a fiscal and political one; taxes, spending and regulation.
It's also largely a debt one.
Posted by: Pofarmer | August 10, 2010 at 10:11 AM
This ought to make the Krugger's and Friedman's of the world happy:
">http://www.reuters.com/article/idUSTRE6740RL20100805"> China may launch environmental tax.
Posted by: daddy the wanna' be heretic | August 10, 2010 at 10:12 AM
I wonder when the "best and the brightest" will learn all those knobs and levers aren't really attached to anything...
Reminds me of the controls on the old steamships(up until pretty recently) the pilot moved the lever, or, alternately in the really old days, pulled a rope with a bell tied to it, and hoped that the engineer was paying attention to make the needed adjustments. Same thing with the economy, all the govt can do is send signals. Problem is, now the govt thinks they are both the pilot and engineer. While they are down there in the engine room, who is watching out for the shoals?
Posted by: Pofarmer | August 10, 2010 at 10:13 AM
SBW: So are you clear now on why people who pay into unemployment insurance should not then have to work to receive the benefits they're due? Or is it suddenly no longer a relevant question for you?
Posted by: bunkerbuster | August 10, 2010 at 10:53 AM
Bunkerbuster:
I'm hurt!!
You didn't read my link at 3:30AM.
Posted by: glasater | August 10, 2010 at 11:14 AM
Why should Bubu read it? He already knows the answer -- the business is owned by a greedy white male who hates people and wants them all to die, particularly the brown ones.
Posted by: Rob Crawford | August 10, 2010 at 11:21 AM
The truth is that nobody really knows how well spending or tax cuts are going to work ahead of time. There is some inconsistency in how well they have worked in the past.
Gotta disagree here, Matt. The Bush tax cuts worked, to the extent they did, because they were targeted. The advanced depreciation provisions provided to small businesses worked exceedingly well because, (gasp) small businesses saw a way to leverage there money to (gasp) make more money. They are funny that way. Same deal with the 1031 provisions and capital gains provisions. Though those might have been used excessively, and IMHO, should have been sunsetted faster, they DID get real estate and capital assets moving. As to spending. I think Govt spending FROM RESERVES could have a stimulative effect. Govt spending from debt simply a) decreases the amount of capital available in the private market or b) devalues the currency that it is based on. Another reason that the current stimulus isn't particularly working is that it is targeted(unlike tax cuts) at places that don't particularly need the money. Like winterizing homes. Now, really, how many homes really need that service? Or, the current "smart grid" fandango. The problem isn't that our grid is "dumb" the problem is that stupid politicians have enacted policies such that generation supply has gotten dangerously close to demand, and will probably be overcome by it. It would be much cheaper and more effective to simply supply more power.
Posted by: Pofarmer | August 10, 2010 at 12:34 PM
It is as if the current regeime in power set out to prove once and for all that the way to fix a bad economy is with and only with government spending. The more the better and it doesn't matter where ... so might as well reward their minions, their base, and attempt to win back some muddleheads.
After all ... they complained loudly and often that Reagan and W were doing it all wrong and selling out everybody's future to reward the rich. Even though it worked it was still bad.
Seems the study showing the left does not understand economics may be accurate.
Posted by: boris | August 10, 2010 at 01:08 PM
Right on Rob and Po-
It seems stunning to me watching/listening to CNBC that the "market" is waiting on tenterhooks what pronouncement the FED will make in about one hour.
This is no way to live.
Posted by: glasater | August 10, 2010 at 01:12 PM
That there was little or no market discipline is obvious. Contrary to the deregulation myths, regulation and politics had long since replaced market discipline in US home mortgage markets. Regulators didn’t just fail systemically to mitigate excessive risk and leverage, they induced it. This didn’t reflect a lack of regulatory authority or zeal, as politicians openly encouraged it. LUN
Posted by: Neo | August 10, 2010 at 01:38 PM
Econ 201: The Myth of the Economic Multiplier
A direct examination shows that money is used for transactions. Money and goods are repeatedly exchanged, but extra production is not "stimulated". Only the original production that earned the money is created, then it is traded. The multiplier is 1.
==========
Economic Value and the Economic Multiplier count transactions, which overcounts value.
Passing dinner rolls around a table shows what is going on. Don't laugh. The first person accepts 6 rolls from the waiter. He takes one roll and passes five to the next person, who passes 4 to the next, and so on.
The rolls are new value appearing in the dinner table economy. The wave of spending and re-spending sends value around the table. The Economic Value approach sees 6 rolls of spending, followed by a wave of 5+4+3+2+1 of re-spending, for a total of 21 rolls of Economic Value, and a 3.5 Economic Multiplier (3.5 x 6 = 21).
But there are only 6 rolls. The re-spending distributes the rolls; it doesn't create more rolls. The real value of 6 rolls is overcounted by looking at the roll-passing transactions.
==========
If there is a multiplier effect from spending, it should apply to all spending. The economy can't know that some dollars come from the government while others come from some individual. That relentless multiplier of wealth from all spending would put us all in Aruba sipping iced drinks.
Assume that through some magic (yet to be explained in detail by Keynesians) the multiplier only works when some people are out of work and only to the extent that people are out of work. Then, of course there could never be a lack of wealth in society. The multiplier quoted by our government economists is 1.5. Any out of work person (excess capacity) would trigger such wealth creation from ordinary spending that either they would immediately be employed, or could be easily supported by that additional wealth. A multiplier of 1.5 produces a fantasyland of wealth creation from the simple act of trading goods, for money, for goods.
It is hard to do any reasonable analysis of Keynesian proposals because (1) they don't give details, (2) they don't give observed results, and (3) it is hard not to laugh at the absurdities. It is like trying to prove that vampires don't exist. The believer says things like "well, you just don't see them because they move so fast and only come out at night".
Posted by: Andrew_M_Garland | August 10, 2010 at 06:30 PM
Actually, Andrew, every freely entered into transaction creates wealth.
Posted by: cathyf | August 10, 2010 at 10:18 PM
Andrew: Paper money is fundamentally different from dinner rolls. A dollar's value isn't based on the replacement cost of the paper and ink it contains, it's worth what only what two people can agree it's worth. That is far more elastic than the roll, which can be baked by anyone possessing the same ingredients and therefore is valued very closely to the replacement costs of those ingredients. Only the central bank can make a dollar.
Posted by: bunkerbuster | August 11, 2010 at 10:25 AM
To cathyf:
Transactions recognize and value wealth, but do not create it. I would appreciate an example to illustrate your point.
To bunkerbuster,
It is an analogy. There are dinner rolls because it would be jarring to have the waiter deliver six dollars.
Here is the situation using companies.
Say company-1 sells a product which includes six dollars of some component. Company-1 pays company-2 $6, which in turn pays a supplier $5, paying a supplier in turn $4, and so on.
A Keynesian economist counts $21 in respending transactions related to the $6 in sales by company-1, and claims a 3.5 multiplier on spending.
Counting transactions overcounts wealth. Company-1 and its suppliers came together to produce $6 in value sold to the customer of company-1, and they divide up that value in their transactions. There is only $6 of value and no multiplier on wealth.
Posted by: Andrew_M_Garland | August 11, 2010 at 06:45 PM
You requested an example... Tonight for dinner we had 2 extra large pizzas and a large garlic cheesebread for dinner. I have a buy-one-get-one-free card that I bought from one of the kids at school for $10. It has five punches and lasts for 2 months, and the pizza place gives the cards out to various organizations to use for fundraising and they get to keep the $10. The food cost me $27.05 plus I used the 4th punch on my card so if I don't use the last one before Sunday, then that's $29.55 total. The two pizzas, the cheesebread, and the chance to help Margaret's softball league were thus worth more to me than $29.55 -- call the amount X. And the two pizzas and the cheesebread were worth less than $25.16 (we have 7.5% sales tax) to the carryout place -- call their value Y. So the wealth created by tonight's dinner was:
X - $29.55 + Y - $25.16 = X+Y-$54.71
Google "Pareto optimal" if you are looking for a more systematic explanation.
If you freely undertake a transaction, then you value what you get more than you value what you give away. If the person that you trade with also trades without coercion, then that person values what you give away more than what you get. The sum of those two differences in value is the wealth created by the transaction.Posted by: cathyf | August 12, 2010 at 12:15 AM
...ok, it's too late in the night to be making up word problems! Of course that's:
X - $29.55 + $25.16 - Y = X-Y-$4.39
Posted by: cathyf | August 12, 2010 at 12:25 AM
Andrew: the multiplier effect doesn't refer to wealth creation. It refers to increasing the amount of money in the economy. The Fed lends Easy Bank $10 for 2 months, and Easy Bank lends $100 to consumers for 10 years. The consumers spend it on wheat, cars and pornography, etc... Viola, the Fed's money is multiplied.
Posted by: bunkerbuster | August 12, 2010 at 02:30 AM
To bunkerbuster,
Would you provide a link where the multiplier is officially used to describe expansion of the money supply? I have seen it used as a claim about government spending, in connection with "economic activity" or more employment and production. I haven't see it used regarding lending.
Economist Robert Barro interprets it as a claim about spending.
--> Government Spending Divides, It Does Not Multiply
Robert J. Barro is a Professor of Economics at Harvard. He found that spending in World War II decreased GDP by 20% (a multiplier of 0.8). Government spending killed GDP, even assuming that the spending itself was useful.
In your example, the Fed lends $10 to the bank, and the bank lends $100 for ten years. Could you provide the detail about how that is arranged? It seems to me that the bank has $10 more, so it can lend $9 more, for a while.
Separately, when the fed takes back its $10 after two months, what happens? It seems to me that whatever lending depended on that $10 has to be reversed.
Posted by: Andrew_M_Garland | August 12, 2010 at 02:41 PM
Econ 101 as it was taught to me and as I recall from 1965. There were two types of government expenditure. There was a payment for a good or service. The other type was a transfer payment. A payment for a good or service, think salaries to government employees, was counted as part of gdp. A tranfer payment was not included in gdp. Think about this. If instead of extending unemployment benefits the government would have hired the workers, that would have been counted towards gdp!
Posted by: Max Regor | August 13, 2010 at 02:11 AM