What we need is a government recession!

Often times when our economy goes into a recession, the media and policymakers get obsessed with spending. Here is their argument: spending causes more money to flow into businesses, which flows into employees, and employees are consumers. All along the way the money multiplies. We seem to discourage savings. Many Conservatives and others come to me and they say their reason for not supporting the government fiscal “stimulus” is because most people will save the money anyways.

What is wrong with saving? If we save our money most of the times that means we put it in the bank. The bank then takes that money and loans it out to a business owner. That business owner may then hire someone new, thus doing the same thing as consumer spending, except without the massive amounts of debt. During a recession savings increase and spending decreases and many people see this as a bad thing, but at the same time they complain about the debt each person has. This simply does not make sense.

What we truly need is a government recession! One where the government saves more and spends less. This way they too can also not run up large amounts of debt. If the government slows spending, that means they require less taxes. If they take less in taxes, then more people will have more of their own money to spend. This is not even mentioning the loss due to the collection and transfer itself.

Debt is nothing but a future tax. Since the future taxpayers cannot vote, we have decided that they are now the target for us to spread the cost to. You think we have a bad recession, wait until you see the one years from now when our children and their children have very high percentage income tax.

The government is acting like a bad teenager who cannot control his money. He goes up spends it on things he shouldn’t and charges up credit cards like there is no tomorrow. What America needs to do is to take that money away from little Barry and show him how the money should be spent (because after all it is YOUR money).  We call that the Free Market!


Arnold Kling on the Stimulus

Dr. Kling is a known supporter of the free-market. Even when he gave his talk at the CATO Institute meeting on Capital Hill about healthcare, he made sure to tell the audience his model on how we can reduce cost is not a policy prescription but a business plan. That means he does not believe that the government should mandate it and whatever comes from the free market will satisfy him. He has a recent article that describes the history of economic thought in Macroeconomic policies and a little bit about the stimulus. This from The American:

“The reason that the Democrats want to delay the stimulus is that they want most of the stimulus to take the form of spending increases, which cannot be handled effectively this year. Tax cuts could take effect more quickly, but the Democrats want to hold tax cuts to a minimum.

Textbook Keynesian economics says that a spending increase will stimulate more powerfully than a tax cut, because part of a tax cut will be saved rather than spent. However, this same textbook analysis says that a stimulus now is more powerful than a stimulus that kicks in two years from now. Even though the multiplier for a spending increase may be higher than that for a tax cut that is enacted at the same time, we can be certain that the “multiplier” for a tax cut in 2009 is greater than the multiplier for a spending increase in 2011.

Finally, I have a concern about the “public choice” aspects of the stimulus bill, meaning the political distortions that make it an ineffective stimulus. If the only goal of the bill were to stimulate the economy, then the focus would be on trying to get the largest possible improvement in employment for a given increase in the deficit. A traditional stimulus proposal, going back to the 1960s, is a temporary investment tax credit. With such a credit, the government in effect provides matching funds for firms that undertake investment while the tax credit is in effect (say, through March of 2010). This would lead to spending increases that are a multiple of what the government contributes.”

This proves not even Keynes would agree with this fiscal stimulus even if you assume it works. This is a great article and a must read.

The rest is here.


Published in: on March 4, 2009 at 1:54 pm  Leave a Comment  
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Talking the talk, and walking to the left…



Published in: on February 27, 2009 at 9:56 am  Leave a Comment  
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Dick Armey on Keynes and Hayek

This is a great piece in The Wall Street Journal written by Dick Armey. He shows great understanding of the field of Economics and how to apply it to the real world. Below I will put some of my favorite excerpts and you should read the rest:

“A father of public choice economics, Nobel laureate James Buchanan, argues that the great flaw in Keynesianism is that it ignores the obvious, self-interested incentives of government actors implementing fiscal policy and creates intellectual cover for what would otherwise be viewed as self-serving and irresponsible behavior by politicians. It is also very difficult to turn off the spigot in better economic times, and Keynes blithely ignored the long-term effects of financing an expanded deficit.

It’s clear why Keynes’s popularity endures in Congress. Intellectual cover for a spending spree will always be appreciated there. But it’s harder to see any justification for the perverse form of fiscal child abuse that heaps massive debts on future generations.


What everyone should agree on is that the money has to come from somewhere, either through higher taxes, borrowing or printing.

If the government borrows the money for the stimulus, then it will either have to print money later or raise taxes to pay it back. If the government raises taxes to pay for the stimulus, it will, in effect, be robbing Peter to pay Paul. If the government prints the money, it will increase inflation, which will decrease the value of the dollar. That would, in effect, rob Paul to pay Paul back with devalued currency.”

I couldn’t have said it any better. These are the exact things I have been saying all along. Of course, one person saying them a few times isn’t enough. We need people to continue and carry this message. A fiscal stimulus will always be popular for politicians so what we need is to educate the populous of all of this.

The rest is here.


The Layman’s Fiscal Stimulus Economics Lesson

picture-3Since the stimulus package passed last night, there needs to be some time for everyone to understand the particular economics behind this. As NetRightNation has pointed out this has been pointed out rightly that it is full of pork. This is logical from the politicians because they are trying to win votes. If their constituents feel as if they are not being taken care of during this time of crisis they will surely be voted out. Most non-Economist do not completely understand every aspect of this plan but they feel it is wrong. So what is the “fiscal stimulus” and what are the theories and counter theories in Economics about it?

This of course starts with our good friend John Maynard Keynes. Keynes worked on a way for us to get out of recessions with government in mind. He worked on a concept called “the marginal propensity to consume.” It was hard to find a chart but above is the consumption and income for 1935-36. As you can see consumption is very close to income. The marginal propensity to consume is how much a person will spend if you give them a dollar. If it is .9 then they will spend 90 cents on the dollar. So for simplistic terms this means that it is a multiplier and important to note for injecting money into an economy. The basic idea is that the increase of government spending on the economy will multiply rising people’s incomes throughout the economy, which will make the initial demand boost. The Keynesian economist (KE) says that it is the loss in demand that has caused the recession. The KE would also believe that businesses would have a coordination problem and they need government to ensure demand will always be there so they can invest. So what is the solution? The government.

Basically, Milton Friedman and other monetarist came along and believed that this was wrong and that in fact you must use monetary policy to shift the aggregate demand, which is everyone’s demand added together. This includes interest rates and the monetary base. So now we have two schools of thought basically arguing over how to increase demand.

So what are the problems with these? First, the problem is even if we assume this can work, there is a huge lag. As in the economy is already in recovery by the time the fiscal stimulus effects everyone, government will not get data that we are out of the recession until a couple of months after the fact. This is why monetary policy is preferred until recently. It is much quicker and requires no legislation. Second, if people expect the tax cuts to only be temporary they will not respond in the way that they would if the tax cut was permanent. The expiration of the Bush tax cuts could be a culprit to the current crisis. The third problem, is called crowding out. This is when we increase fiscal debt which leads to higher interest rates. That will then lower the demand in the private sector and then these would counteract each other. This is why adjusting the interest rate has been the governments favor plan. Of course, if you will notice then interest rate is the lowest it has ever been and loans aren’t coming out. This is because the central bank cannot control the real rate of interest.

What is the real solution then? First, we must eliminate the capital gains tax for good. This is important to make permanent as I mention the lag problem before. We also must deregulate banks and allow them to invest in more than just small business loans and mortgages. Whenever someone invests into the stock market, one of the first tips you will hear is diversify. We do it but we do not allow banks to do it. The Federal Reserve must work on targeting inflation and not creating it. There will be a downward pressure on prices but this will be due to a readjustment period and not because people are burning their money. We should adopt a balance budget. This will not happen over night but it will ensure prosperity for the future of America. We reduce spending and extend the Bush tax cuts. These all will allow for more investment. We do not need to be obsessed with Americans spending money. If they take their extra earnings from these tax cuts and elimination of the capital gain tax then we will encourage investments. This will allow for these bad assets to be bought up.


Published in: on January 29, 2009 at 4:23 pm  Comments (3)  
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Fiscal Stimulius Didn’t Work: Evidence

As I have said many times before the fiscal stimulus wouldn’t work. At best, it would boast consumer spending in the short-run but put us in debt the same amount. Of course what really happened was people didn’t spend hardly any of the money and they didn’t boast consumer spending. Since we either had to borrow or print the money, it is really going to increase future taxes to pay down debt.

Martin Feldstein who used to support the fiscal stimulus wrote in the Wall Street Journal the truth consequences of this “tax rebate.”:

“The evidence is now in and that optimism was unwarranted. Recent government statistics show that only between 10% and 20% of the rebate dollars were spent. The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending. This experience confirms earlier studies showing that one-time tax rebates are not a cost-effective way to increase economic activity.”

He also goes on to bash Obama’s plan to pay lower and middle income folks 1,000 dollars as a rebate:

“These conclusions are significant for evaluating the likely impact of Barack Obama’s recent proposal to distribute $1,000 rebate checks to low- and middle-income workers at an estimated cost of approximately $65 billion. His plan, to finance those rebates with an extra tax on oil companies, would reduce investment in refining and exploration, keeping oil prices higher than they would otherwise be.”

There you have it folks, the fiscal stimulus doesn’t work. Not like most economist knew this before hand but sometimes it feels good to say “I told you so.”

Here is my post that says “I told you so.”

And here is the article from the Wall Street Journal.

Update: Wal-Mart has also came out and signaled the stimulus didn’t work here.

“The boost to US retailers from about $100bn of tax rebate cheques has proved short-lived, with leading chains on Thursday reporting sluggish or falling sales in July, while Wal-Mart warned of slowing sales ahead.”