Six Conservative Guys

Six Conservative Guys - Proudly Serving the Vast Right Wing Conspiracy Since 2003

We'll gladly reply to or publish your response. E-mail Six Conservative Guys

This page is powered by Blogger. Isn't yours?
Friday, June 05, 2009
The Failure of Spendulus

The May unemployment numbers are out and the good folks at Innocent Bystanders have overlain actual unemployment numbers with team Obama's worst case scenario chart. Obama used this chart to sell the stimulus, arguing that if we don't spend trillions of dollars we don't have right away, unemployment would be far higher. Well, the Democratic Congress passed the stimulus and Obama signed it, and unemployment is now higher than the administration estimated it would be without the stimulus.

The indispensable Robert Stacy McCain at The Other McCain, has a great article from December 2008 that explains why ("It Won't Work". In a nutshell, no amount of public relations will overturn the fundamental laws of economics:

No amount of presidential persuasion, nor any conceivable quantity of federal spending, can repeal the basic economic law of supply and demand. Thus, if Congress should enact this idiotic "stimulus" -- a neo-Keynesian pump-priming venture absurdly overbalanced to the demand side of the equation -- nothing is more predictable than its failure to spur real recovery. Indeed, the Pelosi plan is so close to being the exact opposite of what our economy needs at this juncture, many informed observers do not hesitate to say that it will actually delay recovery and perhaps make the recession far worse than it already is.

Here is my take: this giant Keynesian boondogle isn't working for the simple reason that Keynesian spending can only fool people some of the time. The basic idea of Keynes was that recessions are crises of confidence. Basically, people become pessimistic about the future of the economy and start holding onto their money. Fewer goods are sold, leading to layoffs, which leads to less spending by laid off employees. Employers who were planning on expanding start looking for ways to cut costs. Under Keynesian economics, the government primes the pump to push federal money into the economy through a combination of fiscal policy (increasing the money supply) and increased government spending (deficits) to create government subsidized jobs.

Henry Hazlitt explained why all this was a farce in his classic Economics in One Lesson, which can be read in its entirety here. It's a quick and enjoyable read and a very clarifying piece of writing.

For Hazlitt, the fundamental lesson of economics is that you cannot look just at the short term and immediate impacts of policy. Rather, you have to consider the impact of your policies on other groups not immediately targeted by the Keynesian stimulus, as well as future generations.

The basic point is that any spending the government does today has to come from somewhere (As Friedman says, "there is no such thing as a free lunch.") When the government says "hey, we just created 100 construction jobs locally, hooray for us!", Hazlitt asks -- where did the money come from? If it came from taxpayers, then you have to not only consider the jobs created by the taxes, but the jobs destroyed by the taxes as well. The "cost" of 100 construction jobs paid for by the government may be several thousand jobs across the entire economy.

Well, the Keyensian says, we can just borrow it. Of course, all that does is put off the day of reckoning. Do you have credit cards? I sure do. My spending on credit cards happened many years ago -- and yet, I have to pay off the cards with interest. The result is that I spend less today in order to pay debts from yesterday. The government has to do the same thing -- the result, will be fewer jobs in the future, to be paid for either through increased taxes or inflation, which is a hidden tax that reduces the value of your money.

Unfortunately, we've been borrowing for thirty years, so the future is now.

Obama's plan won't work for the same reason that liberal economics under Johnson, Nixon ("we are all Keynesians now"), Ford and Carter did not work. The markets understand that the new spending isn't "real" -- and will in fact have to be paid for by them through increased taxes or inflation. The result, pouring more money into the economy will lead to inflation, and those with money will continue to be risk averse with their investments. Bottom line: few people will invest money in a business in this climate, realizing (a) the economy is screwed and (b) I'm going to be taxed to the hilt on any profits I make anyway, or lose them with inflation. Capital isn't going under the mattress, but it is going into less risky investments that will create far fewer jobs. In short, it's a recipe for stagflation.

For those of you old enough to remember the 1970s, I have one thing to say:

Comments: Post a Comment