catallaxy files

catallaxy in technical exile

Complex problem, wrong solution

with 20 comments

From the WSJ

Indeed, President Obama’s stimulus bill failed by its own standards. In a January 2009 report, White House economists predicted that the stimulus bill would create (not merely save) 3.3 million net jobs by 2010. Since then, 3.5 million more net jobs have been lost, pushing the unemployment rate above 10 percent. The fact that government failed to spend its way to prosperity is not an isolated incident.

‘Indeed’ is exactly the word to describe what has happened.


(HT: Mankiw)

This is no longer a theoretical exercise. The idea that increased deficit spending can cure recessions has been tested repeatedly, and it has failed repeatedly. The economic models that assert that every $1 of deficit spending grows the economy by $1.50 cannot explain why $1.4 trillion in deficit spending did not create a $2.1 trillion explosion of new economic activity.

Why Government Spending Does Not End Recessions

Moving forward, the important question is why government spending fails to end recessions. Spending-stimulus advocates claim that Congress can “inject” new money into the economy, increasing demand and therefore production. This raises the obvious question: From where does the government acquire the money it pumps into the economy? Congress does not have a vault of money waiting to be distributed. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It is merely redistributed from one group of people to another.

Advertisements

Written by Sinclair Davidson

January 11, 2010 at 11:12 am

Posted in Uncategorized

20 Responses

Subscribe to comments with RSS.

  1. Why wouldn’t Obama use the defense that the stimulus did in fact save those jobs, and things would have been even worse and unemployment 3 million higher if the money wasn’t spent? Unprovable of course, but bullshit and politicians are quite comfortable together.

    “Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy.”

    this is a bit simplistic. The borrowing is from outside the economy, or China. Sure, a future drag on the economy, but at present it is additional to the economy wouldn’t you say?

    Entropy

    January 11, 2010 at 2:19 pm

  2. 1. If the borrowings are external, any positives of the stimulus can go overseas too.

    2. By claiming that things would have been worse off, they are destroying the credibility of their own projections – thereby being perceived as making it up as they go along.

    Semi Regular Libertarian

    January 11, 2010 at 2:25 pm

  3. Borrowings must be paid back – that future liability has a present value.

    Sinclair Davidson

    January 11, 2010 at 2:36 pm

  4. Why wouldn’t Obama use the defense that the stimulus did in fact save those jobs, and things would have been even worse and unemployment 3 million higher if the money wasn’t spent?
    .
    because they did very specific projections, complete with neat little charts with a line for stimulus and one for no stimulus.
    Maybe they’ll learn their lesson on making policy based on some scientist’s excel graph that goes off into the future.

    daddy dave

    January 11, 2010 at 2:39 pm

  5. Is there similar evidence for Australia? KRudd is claiming the local stimulus was instrumental in preventing the Australian economy dipping into recession. I hate to see the little snot getting away with it.

    DavidLeyonhjelm

    January 11, 2010 at 5:09 pm

  6. Why wouldn’t Obama use the defense that the stimulus did in fact save those jobs, and things would have been even worse and unemployment 3 million higher if the money wasn’t spent? Unprovable of course, but bullshit and politicians are quite comfortable together.

    i thought they did 🙂

    drscroogemcduck

    January 11, 2010 at 5:10 pm

  7. David L,

    120 000 (at the most) jobs maybe were created by the stimulus. We don’t know if they were permanent jobs and they cost $350 000 each, before amortisation of the bonds required to finance the debt.

    Dr Duck – yes they did:

    http://michaelscomments.wordpress.com/2009/07/01/ineffective-stimulus-why-not-double-down/

    Semi Regular Libertarian

    January 11, 2010 at 5:16 pm

  8. Too True David. It would be a crime against humanity if Ruddy and Henry were able to grease their way out of that pile of dishonesty.

    jc

    January 11, 2010 at 5:18 pm

  9. David – see here.

    Sinclair Davidson

    January 11, 2010 at 6:27 pm

  10. Sinclair, your article is wrong. It claims that the multiplier effect is 1.5, when in fact it is a little under 20. Everyone knows that Roosevelt’s $300 million budget trimming in 1936 led to nearly a $6 billion fall in GDP the following year. 😉

    Michael Fisk

    January 11, 2010 at 7:50 pm

  11. Sinc:

    Does the Treasury make any acknowledgment of the weight monetary policy took on its shoulders in terms of pulling the economy, or for that matter the world economy, out of the abyss?

    Speaking with someone recently it would have been interesting to see what would have happened if only monetary policy was used allowing the automatic stabilizers to operate (only) as regards to fiscal policy.

    Oh wait, that’s what happened back in the 90/91 and 80/81 recessions.

    Here’s the question I would ask of the fiscal spenders. If they think the spending worked so well, would they have advocated leaving interest rates where they were and just allowed spending to take the brunt of the slowdown. How do they think things would have worked out with that policy mix?

    jc

    January 11, 2010 at 7:58 pm

  12. Michael – sigh. Hopefully catallaxy will be restored soon and I can link back to the long debate we’ve had on that point over the past year. 1936 is explained by a monetray policy error on the feds part as explained by Friedman and Schwartz.

    JC – the Treasury claims that fiscal policy did the hard work – but only this time, it isn’t a general cure.

    Sinclair Davidson

    January 11, 2010 at 8:22 pm

  13. Sinclair, Treasury is wrong again. Fiscal policy didn’t just work this time, it also worked during (and possibly due to) the introduction of the Nuremberg laws in Nazi Germany.

    Michael Fisk

    January 11, 2010 at 8:32 pm

  14. If fiscal policy means bombing the crap out of Europeans, I’m all for it. 🙂

    Sinclair Davidson

    January 11, 2010 at 8:33 pm

  15. Did anyone model a mix of fiscal and monetary responses across a wide range of values?

    Semi Regular Libertarian

    January 11, 2010 at 8:37 pm

  16. The treasury claims fiscal policy did the hard work?

    Really? How preposterous. The claim is a direct attack on economics. It’s laughable.

    jc

    January 11, 2010 at 8:39 pm

  17. I think that is being a bit too generous to your own (Treasury’s) efforts. – Keep in mind America has a strong influence on our mechanisms.

    Monetary policy saw a 30% drop in the dollar. Fiscal policy saw the dollar rise.

    A flexible dollar was basically like the pressure valve in our economy, other than laying off workers. Exports rose and prices adjusted vis a vis inflationary pressures (as there is no free labour market).

    Check it out:

    http://au.finance.yahoo.com/q/bc?s=AUDUSD=X&t=2y

    Looks to me like fiscal policy may have over egged the pudding.

    The multiplier in a small, open economy (i.e Australia) tends to zero, at least due to open economy effects.

    Semi Regular Libertarian

    January 11, 2010 at 8:47 pm

  18. Read David Gruen’s speech.

    Sinclair Davidson

    January 11, 2010 at 9:08 pm

  19. I thought everyone who is not a govt pollie was careful to credit fiscal and monetary measures. I listen carefully each time somebody is interviewed and it seems nobody wants to try and apportion the effort.

    I think it is unarguable that the stimulus spending had some effect and equally unarguable that the longer term cost is being ignored by stimulus proponents.

    pedro

    January 11, 2010 at 9:38 pm

  20. Dominic Shore

    January 11, 2010 at 9:40 pm


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: