Someone was just asking me about some right-wing talking points against stimulus that deserve a response -- or at least a better analogy.
Critics like those at Heritage have used the analogy that stimulus spending is like taking water from one end of the swimming pool and putting it in the other end. A dollar that the government spends on stimulus is a dollar someone else won't be spending, so there's no net gain.
This is a typical pre-Keynesian mistake which, if adhered to, mires the economy in recession when we should be applying fiscal policy to generate growth-growth that otherwise would be sacrificed because they don't understand the dynamics of the moment. It's the kind of idea that drives Paul Krugman nuts, because he thought we already learned that lesson.
You see, the swimming pool analogy doesn't work because it's static -- it ignores the dynamics... the actual moving parts in a real economy. A static economy would be one without cycles -- demand would be effectively constant -- and you certainly wouldn't have demand contractions like the Great Recession.
Once you admit such cycles, then the static view disappears. It's perfectly easy to imagine dollars sitting on the sidelines not getting spent or invested, and millions suffering unnecessarily because of it.
A better analogy is to think of the economy as a car and fuel as the demand that propels the car forward. The gas tank is empty, but we've got a tank of gas sitting on the lawn next to the car. If we put the gas in the tank, the car can get started and go somewhere.
Is there any more gasoline in the world? No. But we took the gas we had sitting there on the sidelines and used it to get the engine started.*
You can think of gas as the excess savings that won't otherwise be absorbed because of demand contraction/liquidity trap. And yes, the government will borrow the gas from idle gas tanks across the country -- monetary policy helps here too, by lowering the cost of borrowing -- and pay it back once we're back on track.
The folks who refuse to understand or accept this dynamic analogy simply assume that savings always instantaneously equals investment, so the gas must already be in tank. They're like weathermen in a building with no windows, telling everyone that according to their computer model, it's a beautiful sunny day, when in fact there's a hurricane outside.
And it's not just academic. It's a tragic waste of human potential.
*The central bank may reasonably choose to print more "gasoline" at this stage, which also helps.
This post originally appeared at Jared Bernstein's On The Economy blog.
give bill gates a million dollars and he won't notice, give a guy standing by the freeway ten dollars, he'll spend it and the guy at circle k gets to work one more day and and and.....
So, the concept of stimulus would be more like, the government rides into a gas station, at gun point forces the owner to fill the cars tank with gas, does not pay him because he has lots of gas and then drive away.
having said that, the war time years were not really that much more prosperous than the 30's. it may have seemed that because we sent off millions to fight a war...this reduce some competition for jobs. But true recovery di not happen until government expenditures were reduced and business felt comfortable in expanding their operations.
The whole story is indeed a strong repudiation of the Keynesian approach.
Most people either have a credit card or have a decent understanding of how they work. Most people also understand the concept of their "income". GDP is our national income and government borrowing is taking a cash advance on our national credit card.
You can treat that cash advance the same as you treat your income... RIGHT NOW, but later on, you MUST subtract from your income (GDP) to pay back that cash advance plus interest.
Cutting government spending will hurt the economy right now. Yes. Every day that our government puts it off however creates a bigger problem for the future. When the future becomes the present, paying back the debt will hurt the economy, and paying the interest will hurt the economy even more.
I guess the Keynesian fools like Krugman and Bernstein think that the government has a national credit card with an infinite limit, that deficits can be perpetual, and debt never needs to be paid back.
The sad thing is that if we continue on this path of deficits and "stimulus" and experience the inevitable catastrophic collapse of the monetary system, and maybe the political system, there are people who will blame it on "capitalism", even though central planning and the Federal Reserve are the real culprits.
It can't be done.
Mike:
They made another bad mistake in voting to deregulate the financial sector, but everyone knows that now. It was a disaster for the world and cost us trillions of dollars.
In these key areas then, which determine a country's economic power as opposed to just military power, conservatism has been a big failure, domestically and internationally.
And that is happening.
Unfortunately, that does not bring all those jobs back. Sure, a few jobs are created to support the automation (installation, monitoring, maintenance, etc.), but only a fraction of the jobs that formerly existed to do the same thing.
What do you do with all those other workers who don't qualify to be a technician?
I think the progressive-socialsitic point of view is exactly what got us into all this trouble. We have high taxes relative to some other countries, regualtions that have been adding increasing costs to goods and services, and government mandates that have made it increasingly expensive to hire employees. No wonder some companies have gone offshore. This is not to mention that unions have forced some companies to pay higher than market wages for many types of positions.
If you really want to stimulate the economy, consider this: Sans government spending, tomorrow, everybody breaks and throws-away their cell-phone. There next day, the purchase of new phones creates a new communications boom. Everyone burns-down their house and camps...this then creates a new housing boom...perhaps this would be best, as the boom would be driven off the backs of the insurance industry.
Thus, government spending is only actually stimulating if applied to new product research and development. Say something in the green energy line. Investment enough to create a new well-needed consumer product, e.g., a clean energy heater or mode of transport...only this type of invention investment spending can effectively stimulate an economy.
The rest amounts merely to paying a month's protection to the mob--they're the one's from whom you need protection, they're already loaded, control all the rackets and might just rather break your thumbs and watch you go under.
Now, there's your analogy.
Electronic circuits are, too.
The flow of money through the economy is analogous to the flow of charge through an electronic system. That charge flow is called current. The quantity of money in an economy is analogous to the amount of charge in an electronic system.
I invite economists who doubt the premise of this article to contact an electrical engineer at their university to sit down with them and discuss the design considerations and methodology for designing decoupliing capacitance circuits for circuit boards. Essentially, the same principles are at work.
If you can get a clear picture of how decoupling works, you will understand this article. I know, I know, the non-linear equations that describe the eonomy are much more complex (and not even known), than those for a circuit board, but the principles are the same. And obvious.
I'm sure the bailouts could have been tied to some sort of curtailing of bonuses, at least until the bailout money had been paid back.
So, was the decision not to do so tied to the panic that was clearly gripping the government, or was it done intentionally to help out the Congresscritters' banking buddies? I suspect some of both.
Bush admitted.
If there were WMD no one would have any questions or hindsight.
Torture would not even be such an issue.
The point is you guys knew full well the day you would come to ask for a bail out with to big to fail as a threat. This was the premeditated strike any accountant can tell you at a present rate of sale your dooms day when you can't offset the balance.
Just like you knew full well there were no WMD. The Iraq war was planned long before the 911 ever happened. Then we bought one and got one free first in Afghanistan and then in Iraq. Bush did a great job in transferring the wealth of the middle class to the one percent rich. Mission accomplished. He was welcomed as a liberator a cake walk. The victory celebration was a get rich code for the rich making money from war.
The Bush doctrine is to shoot first and aim later protecting us from invasions after the implosion. we cannot sat we did not think we would be struck when we were struck in the same place by the same people a few years prior.
people knew the banks were insuring plan failures to make a profit signed off by Henry Paulson.
CO's got paid for self destruction.
The body politic suffers from a whopping great bout of monetary constipation, wherein most of the money is congealed and compacted into the hands of a few. This is a direct result of the Republican revolution and its brilliant economic policies. It's like nothing so much as a nasty case of constipation, with terrible effects on the health of our society.
http://www.youtube.com/watch?v=MtPMFDN6eYE
Energy, like capital/equity fuels the economy.
Bought tax code and deregulation extracts energy from the economy, and siphons it into huge masses, that drive up life's necessities.
Huge massesof EC?energy, snowball in size due to their Citizen United force of gravity.
NO AMOUNT OF FED INFUSIONS WILL BREAK THIS EQUASION, ONLY FLOOD the economy with brief amounts of fuel WHICH WILL FURTHER ENGORGE THE INFLATION DRIVING MASS.
Tax/tariff code must nurture fair trade ANd our working economy, without compulsory heavbing of equity from the machine in every single energy/equity transfer.
You need to go sleep it off, looks like.
Who gave the black hole of intl bankers this right to create debt, hoard, and profiteer, to the point where the equity removed from the economy, in and of itself carries so much power? Who recently voted to continue to allow 1 entity to, by unregulated percentage, drive oil up to pre-riot inciting levels? So, the hoarded trillions, buy the set date, futures, and demand has little to no effect. A least a minimum total consumption, is guaranteed.
A stimulus (transfusion) would be helpful but, unless surgery is performed to relieve the cause of the coagulation (legalized bribery), the blood (money) will simply continue to coagulate at the top.
Western Nations seem to have gone to default of letting Germany and China buy America !
Better to reduce Government cost by 30 % and increase productivity by 30 %. Let the middle
class keep what they Earn and Work to themselves, not Taxes and Inflation !
Bloated Government needs to get efficient and smaller !
How? What will replace that function? Where will all those government employees go get jobs?
Government employment should not be cut, until the demand for labor in industry is strong enough to absorb the layoffs.