Arnold Kling  

The Stimulus and the Somme

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How Romers' Research Undercuts... Managing Retirement Accounts...

Mark Thoma gives us Joseph Stiglitz and Martin Feldstein being interviewed by Charlie Rose. I listened to it last night, and I found it so chilling that it adversely affected my sleep. Two issues stand out.

1. Both of them are keen on re-working mortgages. Neither of them mentions non-owner-occupied housing or any of the other issues that make re-working mortgages extremely difficult. At one point, Stiglitz says that banks may be postponing writing down loans because they are waiting to see what sort of bailout they might get from the government. But he doesn't draw the obvious conclusion that government interference is the problem, not the solution.

2. Both of them are keen on trying a big stimulus. Stiglitz says that everything done so far has been a failure, but again he doesn't draw the obvious conclusion. Instead, he says we have to try something bigger and different.

I was reminded of the Battle of the Somme, one of the worst policy blunders of all time. Having experienced nothing but failure using offensive tactics up to that point, the Allies decided that what they needed to try was....a really big offensive. Just as Feldstein and Stiglitz pay no attention to the on-the-ground the housing market, the British generals ignored the impact of machine guns on men advancing over open fields.

My guess is that in 1916, anyone who doubted his own ability to direct an enormous offensive involving hundreds of thousands of soldiers would never have made it to general. Similarly, today, anyone who doubts the ability of a handful of technocrats to sensibly allocate $800 billion would never make it into government or the mainstream media.

How many people will have meaningful input in determining the overall allocation of the billion stimulus? 10? 20? It won't be more than 1000. These people--let's say that in the end 500 technocrats will play a meaningful role in writing the bill--will have unimaginable power. Remember that what they are doing is taking our money and deciding for us how to spend it. Presumably, that is because they are wiser at spending our money than we are at spending it ourselves.

The arithmetic is mind-boggling. If 500 people have meaningful input, and the stimulus is almost $800 billion, then on average each person is responsible for taking more than $1.5 billion of our money and trying to spend it more wisely than we would spend it ourselves. I can imagine a wise technocrat taking $100,000 or perhaps even $1 million from American households and spending it more wisely than they would. But $1.5 billion? I do not believe that any human being knows so much that he or she can quickly and wisely allocate $1.5 billion.

Once again, I am very happy that we are not fighting World War I. The Paulson/Obama offensives may be squandering resources, sowing confusion in households and businesses, and creating large financial imbalances. But they are not sending young men charging into machine guns.



COMMENTS (48 to date)
dearieme writes:

No; but we can all drown in the mud just the same.

muirgeo writes:

" Presumably, that is because they are wiser at spending our money than we are at spending it ourselves."

I would argue that indeed they are wiser and more informed having some of the worlds top advisors, economist and business people advising them.

And they are not spending peoples money because most people don't have money to spend. Most people don't make enough money to even pay taxes. The people who do have money to spend ( the very wealthy) realize there is no demand for which to fill with their investment dollars so they are not spending either. All this is a big result of setting up rules and policies that drive and concentrate money to the top and send wages and savings down for the average American.

Ultimately the money they are going to spend will be that which has accumulated disproportionately at the top because of 30+ years of rule changes favoring them at the expense of the large middle class. These rules changes were made by similar men with different economist and advisors, say like Milton Friedman and Alan Greenspan.

Barak said it well when he said, "Wall Street doesn't thrive if mainstreet doesn't thrive."

I would really like to know where contrarians like Mr. Kling think demand is to come from if not the government.

Finally, the market recently WAS allowed to allocate resources and provide risk for OUR money and it failed to the tune of Trillions of dollar. I doubt the government could do much worse but indeed what a great time to be a tenured economics professor pontificating from the sidelines with no real skin in the game.

Deborah writes:

Whose money are they going to use? Just those at the top? You're crazy. They're going to use everybody's money. Anyone who pays taxes. Money is money. And what they don't take from the hide of taxpayers they'll either print (making the dollar worthless) or borrow. If borrowed, it has to be paid back to wherever they're going to borrow it from (China?) ... and I, my children, my grandchildren, your grandchildren will be on the hook for it. If we don't pay it back when China wants it, what happens then? This is a national security issue as well. So, the almighty government needs to proceed cautiously, but that word isn't in their vocabulary.

S writes:

"I do not believe that any human being knows so much that he or she can quickly and wisely allocate $1.5 billion."

This argument by Kling is one of the most persuasive (and easily shared) that I've seen yet against the bailout. Most people don't necessarily understand the complex relationship between demand and the economy, the effect of a "multiplier", or any other bizarre macro effects. On the other hand, they CAN put themselves into the shoes of the techno-crat and see what an impossibility this would be. (Particularly for someone who doesn't have a track record of success or accomplishment).

Muirgeo's comment is interesting. From the best I can understand, it stems from a fundamental belief that the money of the wealthy = money of the people, because, after all, they were only able to get that money through extortion of various sorts.

But even if you accept that premise, I'm not sure it follows that a few technocrats could better allocate this money then, say, a tax refund to millions of US citizens.

floccina writes:

@muirgeo

The knowledge that worlds top advisors, economists and business people lack is very local and specific. Guy 1 got into this home by lying and planned to flip the house and has no intention of paying any amount for the home while guy 2 is up right and is making his home payment but paid way too much because of bubble and could use a little help. One size does not fit all and the top advisors cannot know all that they need to know, it is impossible.

I think that we should end the FICA and the Medicare taxes, both the employee and employer amounts to help the latter guy. Later we can raise the income tax to make up for some of the lost revenue. This will kill the fraud that SS is a retirement plan and will allow us to reduce the total burden of SS by lowering the amount that the rich and middle class get in retirement.

Maniel writes:

muirgeo wrote: "... The people who do have money to spend (the very wealthy)..."

Presumably muirgeo believes that there must be an infusion of cash - through demand or through taxation from "the very wealthy" - to revitalize our economy. With respect to demand, "the very wealthy" don't need any stimulus since by definition, they already have enough money to satisfy both their needs and their wants.

The idea (not explicitly stated by muirgeo) that we must tax "the very wealthy" would miss the point that the very wealthy got that way and stay that way by avoiding taxes; even today, many smart wealthy folks (there are few dim ones) emphasize income from real estate over that from traditional (taxable) work. This explains why a progressive tax penalizes work rather than wealth. Our high earners are usually people – doctors, entrepreneurs, etc. – who have invested relatively large amounts of time, energy, and emotion, have forgone earnings to obtain advanced university degrees and training, and have taken significant financial risk to realize their current earnings potential. They generally work long hours.

Wealthy people, those who have already made (or inherited) their money, are motivated to find ways to protect their wealth. Since they don’t have to work, wealthy people may decide to pursue such avocations as buying and selling property and effectively avoid most taxes on work income.

I agree with Deborah. We are all, rich and poor alike, on the hook for the debts of our government.

Gary Rogers writes:

So, if you are an economist and don't really understand the workings of the economy, how do you justify your Nobel prize? You take what the politicians want to hear and pontificate. My own analogy is that it is like 18th century physicians prescribing blood letting. These were the smartest men of the time and they were recommending something completely stupid and unproven. Yet, George Washington believed them, so why should Barack Obama be any different.

Economic stimulus is very much the same thing as blood letting because it drains us of our wealth when it is most needed and is based on a complete lack of understanding of underlying problems. Unfortunately, the are also similar because they both can kill the patient. Both economists showed their lack of understanding when they talked about the problems of the last seven years (translated it's all Bush's fault) and how the economy was actually just a bubble propped up by artificial stimulation then endorsed more of the same. Of course the proposed stimulus solves the problems that were not addressed before because it will be "properly targeted."

Let's all prepare for economic blood letting and see how long our patient has to live.

Bob Murphy writes:

Fantastic post!

Eric Sweeney writes:

If the very wealthy "got that way and stay that way by avoiding taxes," how is it that the top 5% pay almost 60% of total income taxes? Is it just possible that they got that way by generating income? Just curious.

wintercow20 writes:

Lest any of us not look at the data, aggregate consumption has barely fallen since the start of the recession ...

David W writes:

Eric - the top 5% of those who pay income taxes pay almost 60% of income taxes, according to the IRS definition of income. Maniel's point is that being wealthy and making IRS-definition income aren't the same thing. That's where Warren Buffet's famous complaint that his secretary pays a higher tax rate than he does comes from.

Phillip Huggan writes:

"I do not believe that any human being knows so much that he or she can quickly and wisely allocate $1.5 billion."

You and your followers are incorrect. This would form an unnecessarily small bound on how large beauracracies and net worths could grow. There are 1000 billionaires and only 150 sovereign nations that command such wealth. You are attacking the 150 and not the 1000?!
Under this logic Edison and W.Gates and Rockefeller Goundation could never have happened. Under this logic war is impossible and America gets invaded by everyone. Small government is a pussy argument.

Michael S writes:

I agree with Deborah. These technocrats are making decisions that our children will pay dearly for. We should take the market readjustment "hit" now. It will hurt less now than later.

Josh writes:

Phillip,

There is a difference between allocating fewer resources than a billion dollars but allocating them efficiently enough that you generate wealth and become a billionaire, and simply being given a billion dollars to reallocate somewhere.

RJ writes:

We can't "take the hit now" as MIchael S so bluntly put it. Deflation is far too large a threat to sit around and twiddle our thumbs. Anything that happens must be done to stave off deflation, because nothing will destroy our economy as fast.

As for the ridiculous small government argument put before, this assumes that a bunch of guys just sit down in Washington and start flinging out money as they see fit. Most of this funding will be from projects pushed by the states, which will then be reviewed by a central authority to see whether such projects are worthy of funding. You posit that this endeavor will be entirely top down management, when really we are merely reviewing projects that the states deem worthy of funding.

Every State Government in the country will be involved in the distribution of this money, far more than 1000 people, not to mention contractors, review boards, municipal governments, the OMB, etc. etc. I have to say Kling, I usually don't take you as a partisan hack, but this article reeks of over simplification and purposeful deception.

You pull a number out your ass (500, 1000) and act as though every single project will be included in the bill that passes congress. Congress is going to authorize the bureaucracy to find worthwhile projects, which will be submitted by the states and federal government, which will then be reviewed and finally authorized.

I expect better from you Prof. Kling.

MtnGoat writes:

"I would argue that indeed they are wiser and more informed having some of the worlds top advisors, economist and business people advising them."

This is empirically impossible, because the only person who knows what an individual wants, and for what reasons they want and value that goal..is the person themselves.

There is no number of people, or anyone smart enough, to replace knowledge that only resides with each individual in turn.

" Ultimately the money they are going to spend will be that which has accumulated disproportionately at the top because of 30+ years of rule changes favoring them at the expense of the large middle class. . "

The very nature of *any* productive activity in a market means that mathematically, concentration of capital will occur. When I sell 100 widgets...the money for it will 'concentrate' with me, and the value of the goods, worth more than that money, will disperse to the customer. There is not on unjust thing going on here.

Your critique is based in what I call the 'one way street' argument of trade, in which only money is held to have value, in spite of the empirical fact that the customers are proving by their choices that this is not the case, and at the same time also empirically proving they value the product more than the money they spend on it. If they didn't, they wouldn't spend the money.

Anyone analyzing economics and ignoring the fact that trade is a two way street respresenting a consensual exchange in which each party is judging that they benefit more from what they get than what they give, is provably, and falsifiably, not making a valid argument.


"I would really like to know where contrarians like Mr. Kling think demand is to come from if not the government. "

Where it all comes from anyway...the individual. demand exists when there is no govt, so we know that it is not the source. It also exists when there is no State currency, and trade is conducted via private currency or barter, so we also know that the State is not the source of value embedded in trade or currency.

The State has usurped the people's fully owned right to their own, non state manipulated currency, and their own, non State manipulated demand. What we see before us now is the market, which cannot be beaten, telling us that the value of all those securities was not correct. And there's not a danged thing the State could do about it. Market value is an empirical quantity, it's not just made up and 'imposed'.

The Statists solution? More of what already harmed us.

"Finally, the market recently WAS allowed to allocate resources and provide risk for OUR money and it failed to the tune of Trillions of dollar."

No it wasn't. It was distorted, again, by State backed entities pumping up the market value of risky instruments beyond their actual market worth. Without their participation and the expectation that they would not be allowed to fail, the price of these products rose far higher than it would have in a market where the price was commensurate with risk.

the problem was not the securities themselves..it was that these risky securities were not free market valued.

they are now.

Phillip Huggan writes:

No person can get to one billion within one lifetime without help. Stop Josh-in'

Lord writes:

Presumably, that is because they are wiser at spending our money than we are at spending it ourselves.

That is a pretty large presumption. What they spend it on will bear little resemblance to what individuals spend it on since individuals do not invest for social aims, nor is it our money or even to a large degree our children's money since they are being paid to invest by the market. Now if you believe we have no future then this is a pointless exercise, but if you think we just might have one then this is the time to do so.

Jeremy, Alabama writes:
I expect better from you Prof. Kling.
Prof. Kling's essential point is that there are no bad ideas in government - merely ideas that have not yet been tried on a sufficient scale. This is the same reasoning that produced the catastrophe of the Somme.

What's more, I agree with him that there are probably very few people involved in allocating TARP and bailout money. These things are done top-down, and, although they wind up eventually in some detailed spend plan, the sums start off as 8 or 9 figure allocations, quite arbitrarily. As for the "review boards, OMB etc", judging by the government's ability to corrupt their way through a hundred bucks, or a million, or a billion, I'd say such oversight is pure fiction.

Bud Hammons writes:

RJ obviously has been drinking the Big-Gummint koolaid, nor has he read his history.

The proposition that a bunch of lawyer-bureaucrats have a clue how to allocate resources with the miniscule amount of data at their disposal is delusional.

Try playing the Beer Distribution Game for a little lesson in humility.

Central planning has been a dismal failure wherever it has been tried. If it had, all those Five Year Plans propounded by the Soviet Politburo would have avoided the collapse of the Soviet Union.

v/r,

-- Bud

MtnGoat writes:

"As for the ridiculous small government argument put before, this assumes that a bunch of guys just sit down in Washington and start flinging out money as they see fit. Most of this funding will be from projects pushed by the states, which will then be reviewed by a central authority to see whether such projects are worthy of funding..... "

So in realistic terms, by the time this money, and the years or decades long projects even get underway, the 'stimulus' will be so far lagging the problem that it is intended to solve, it's market distortion will be even worse.

No longer will the conditions it is intended to fix exist, because the economy will have changed, and yet this money will be lagging it by years or decades.

this is the kind of thing we are expected to believe is crafted and tailored to current conditions, when it can't by first principles even be spent when it's 'needed'?


'Every State Government in the country will be involved in the distribution of this money, far more than 1000 people, not to mention contractors, review boards, municipal governments, the OMB, etc. etc.'

So what? Not one of them is better qualified to know what the individual wants than the individual.

The money they will be spending is inflated cash, worsening the economy, borrowed cash, distorting the credit market already distorted beyond recognition by other State manipulation, or tax money, in which case it comes from places the market has already decided that money should be.

There is not one case in which the outcome can be superior to letting the market actually clear. It has already told us what the true value of certain securities should be. Now, instead of paying attention to this, we are urged to once again ignore these signals and plunge ahead with market distortion even more.

MtnGoat writes:

what *should* we do? Well, here's what...engage in an *actual* stimulus that does not involve inflation or market distortion to the degree of most of these Statist ideas.

The tax holiday bandied about is the least bad of the stimulus ideas, in my view. No, big State folks don't like it because they want the State deciding where to spend the markets money...not the market. This is the mindset that put us here to begin with.

Instead of distorting the market as a stimulus, with a helping of inflationary money production and a side of borrowing, lets USE the market. Suspend FICA/SSEC and Income tax liabilities for 2, 3, or 4 months for all citizens. This even reaches the poor, since they still pay FICA/SSEC even if they are under the income tax line and pay zero, so they get more. Everyone else, gets to keep far, far more of their own money.

This money is injected where *they*, the MARKET, wants it to go, wether it's paying off credit or buying stuff. this is how you stimulate an economy, by letting the market work.

yes, it will innately make the atrocious deficit even worse. However, since only a few would ever support cutting the budget which should be done anway, at least this approach has the market infusing capital back into the game instead of having the State induce further distortions.

Mark writes:

So, go sign this:

http://www.ipetitions.com/petition/NoEconomicInsanity/index.html

Will it help? Who knows? But let Washington hear that we don't want them to spend our money, our childrens money, our grandchildrens money, our great grandchildrens money, etc.


muirgeo writes:

"I listened to it last night, and I found it so chilling that it adversely affected my sleep."

Some of us look at the evidence and find the idea of doing nothing and letting the economy spiral deeper into recession chilling. There are two sides ,at least, to this debate and I don't think anyone has a corner on the market of its truth.

I choose using our evolved intelligence to promote and optimize the economy over a belief that some Invisible Hand God will make everything better if we just do nothing but pray.

RJ writes:

I'm glad to see the virulent response my post brought.

To all
This argument that the government is trying to provide for the individual according to the individual interest is flat out wrong. We are not trying to find out what the individual wants. The government isn't buying groceries, or computers, or consumer goods for individuals. The government is supplying public goods: roads, power lines, technology investment, sewers, etc. And all of these projects will be put forth by the states or the federal government, and then reviewed by a non-politically motivated board to determine whether funding should be forthcoming.

So stop throwing around these individuals determine what they need BS. We are investing in that which individuals do not have the ability to create, that which they need but cannot create. Unless someone here can show me a better formula for the provision of public goods, I cannot and will not cede the point here.

Second, the government hires contractors and architects and construction workers, buys capital goods, which must be produced by other companies, which pay their workers, etc. All of this increases demand in the private sector, which is the real key to the stimulus.

So we get a two for one deal. We invest in necessary public goods, and create demand in the private sector, which will ripple outward. The best part is that it is a targeted stimulus. Other than the financial sector, the construction sector has been hardest hit by the recession. Instead of money being spread over many people who will pay down debts (which is not a bad thing, don't attack me for it, but it is less effective and stimulating demand than actual consumption) we are hiring recently laid off workers who will need the money for essentials, and will use it to consume at a much higher rate than the population as a whole.

Disagreement?

MarkJ writes:

Once again, I am very happy that we are not fighting World War I. The Paulson/Obama offensives may be squandering resources, sowing confusion in households and businesses, and creating large financial imbalances. But they are not sending young men charging into machine guns.

Wrong. Directly or indirectly, some people are going to die as a result of economic decisions made in Washington. And it's not inconceivable that if all those "smart people" really screw the pooch, then they're also going to face mutiny and revolution just as also happened in World War I.

Yeah, I know, the above sounds far-fetched. However, if you'd told "Joe European" back in August 1914 that a) 10 million people would die in the coming war, b) the Hohenzollerns, Hapsburgs, and Romanovs would all be overthrown by 1918, and c) a second-rate postcard artist from Austria, just enlisted into a Bavarian regiment, would eventually conquer most of the Continent...they'd have laughed you out of the room.

KerfuffL writes:

"Once again, I am very happy that we are not fighting World War I."

Have patience. After all the stimulus fails, you will be. It's plan B. Ever hear Krugman on the subject of how WWII ended the depression?

MtnGoat writes:

"This argument that the government is trying to provide for the individual according to the individual interest is flat out wrong. We are not trying to find out what the individual wants."

And that is the problem. Because the problem is market distortion caused by the State, the market proves this, and the market consists of individuals taking individual actions for individual reasons.

if the State is not trying to do what the individual wants, then it is, once again, intending to act outside what the market, and it's constituents, actually want.

let's be clear...not what other people claim they want, and not what they claim they want when they push for the use of State force to benefit their own ends...but what they actually choose when they don't have that crutch and can't use other people via the State.

" The government isn't buying groceries, or computers, or consumer goods for individuals. The government is supplying public goods: roads, power lines, technology investment, sewers, etc."

these are all still individual goods. you show us a public not comprised of individuals, and I'll not gripe about this claim.

"And all of these projects will be put forth by the states or the federal government, and then reviewed by a non-politically motivated board to determine whether funding should be forthcoming."

There is no such thing as a non politically motivated State board...especially for economics. they are the State, they are *there* to be politically motivated.

"So stop throwing around these individuals determine what they need BS."

Stop attempting to claim experts know what is not knowable by anyone but the individual.

"We are investing in that which individuals do not have the ability to create, that which they need but cannot create."

Individuals in cooperation with other indivudals do everything you say in private formats. There are private roads, sewers, fire departments, TV channels, markets, farms, research facilities, snowploughs, all these things.

We don't need the State to tell us what to want, how to want it, or how to build it. it *usurps* our ability to create and cope, it does not augment it.

"Unless someone here can show me a better formula for the provision of public goods, I cannot and will not cede the point here."

I suspect nothing will can meet that metric because I suspect your baseline is one not rooted in non State means. How do we know your 'better' format is falsifiable by means other than State solutions? If it is not there is no argument possible which can meet your criteria.

"Second, the government hires contractors and architects and construction workers, buys capital goods, which must be produced by other companies, which pay their workers, etc. All of this increases demand in the private sector, which is the real key to the stimulus."

Let's ignore the very real fact that payment for projects of this nature will lag the problem they are intended to fix by years, or decades. Something you have not attended.

You're working the zero sum game here. You want to use money taken from the market to put it where the State wants it, less losses for shipping and handling, of course.

that same money in private hands is also creating things. it hires peoples pays them, builds and creates things, and without a zero sum transaction the entire way...and your model *begins* with one. those dollars you want spent are pulled out of the very market you intend to boost in order to boost it! economics is not merely money changing hands.

it must increase total value in the economy to do any good, and the only transaction in which this occurs is the market trade, where both sides implicitly and freely agree that they are each increasing their value at the same time.

Now, you have two other options. you can argue that instead of pulling money from the market to use it in the market, you will inflate the money supply. Ok, now you're going backwards. Or you can borrow it...now competing with existing debt in addition to piling more on for later.

All because you refuse to allow the market to function, and all after a big slap in the head from the market over screwing with it already.

"we are hiring recently laid off workers who will need the money for essentials, and will use it to consume at a much higher rate than the population as a whole."

i don't care how much they consume, what matters is how much value they are injecting into the market when they do. since you are advocating a zero sum scheme, the amount they inject cannot be more than that you have taken from everyone else in order to get them to spend it. you didn't add any value to the system...you are just advocating shifting it around. if this worked, the soviets and other such zero sum systems would have wiped us out.

shell games with who spends, but do not attend the increase in value on both sides that only occurs during a true trade, are merely involving coercion and political means to serve their own ends. yes, those ends may involve what you want for others...but it's still you wanting those things, isn't it.

RJ writes:

Ha!
Great Post Mtn Goat, I mean that.

As far as the zero sum game claim goes, it would only matter if we were borrowing from ourselves. And we aren't, we're pawning off our treasuries at ridiculously low rats of interest around the world, though mainly to the Chinese. Sounds like a good deal to me. We aren't taking from our public right now, we're borrowing from the Chinese right now, and paying it off in the future. If borrowing 7% of our GPD from them now at a 3% interest rate increases future GDP growth by say, .5% a year for 50 years, thats a great deal for us. In fact, given the low interest rates we're offering the rest of the world and private investors, there has never been a better time to borrow. As long as the stimulus multiplier is above one, we're still profiting. This holds especially true for public goods and investments that will continue to pay off years down the road.

And as you clearly support free market ideas, I can only point out what I find obvious. We live in a world where the vast majority of markets are Monopolistic competition, Oligopolistic, or Monopolistic. All three of these markets lead to Pareto-inefficient outcomes.

You and I have a philosophical difference clearly. I believe that the so called "Market distortions" are in fact the government forcing the markets to more efficient outcomes. You think that the government makes markets more efficient. But I, and a clear majority of economists, would say that the recent episodes support my thesis. The Government didn't create sub-prime lending, nor collateralized loans, nor credit default swaps. THe market did, and now government has to step in to clean up the mess.

Though I doubt you agree with my interpretation of events.

Rj writes:

Oops, meant less efficient in your case, sorry for mistake!

MtnGoat writes:

thank you. though we disagree, i appreciate your apparently fair reading of my arguments, something that is commonly lacking between parties over disagreements like these.

I'd like to respond to this, then i'll check back later for another comment or two...

" I believe that the so called "Market distortions" are in fact the government forcing the markets to more efficient outcomes."

That may well be the case. The problem is, these actions are taking people's market rights in order to serve someone elses idea of efficiency.

I contend the market is not there to be the ne plus ultra of efficiency, though it often is...it is merely there to serve as a peer to peer clearing house for everyone's desires in an environment where all sides are equally met with respect to negative rights.

it is not efficient to have 300 brands of shampoo...but it does serve the various desires of customers. it is not efficient to have people eating more than one food or the few necessary for existence...but it does serve the desires of the consumers.

this is the nexus of the problem I have with your statement...i don't care what the State or anyone else finds more efficient, I wish to defend the rights of each and every person, rich or poor, white or black or purple, woman or man, to engage in trading for what they want, as equals in rights with those they trade with, for what *they* want.

best regards.

Randy writes:

They say the government will pay for this and the government will pay for that... really? How is that possible? Are all the politicians going to empty their bank accounts to pay for the "stimulus"? I think not. The political class is not about to give up its revenue stream. We're not spending enough, and not paying enough taxes, so they are finding ways to force us to pay anyway. All the rest is propaganda.

Phillip Huggan writes:

Is the cholera in Zimbabwe proof Mugabe is a Libertarian?

roga writes:

"Finally, the market recently WAS allowed to allocate resources and provide risk for OUR money and it failed to the tune of Trillions of dollar."

I agree with muirgeo on one point - a lot of cash is definitely concentrated by dishonest and unscrupulous means. But in this case, the vast majority of the people we're "bailing out" were doing exactly this. They got caught red-handed with a hand in an empty cookie jar, and our government's response was to bake another batch of chocolate chip for them.

People forget, because it didn't really affect us much in the US and it indeed slightly reduced our trade deficit, that the first big sign of a problem was the collapse of the dollar bubble in 2007 and early 2008. It preceeded the real estate bubble by several months. Money does not equal value, unless there is a true market for money. With world currency liquidity, we are now seeing something like that - and the dollar got called out, plain and simple.

It was caused by our government loaning more money out than the economy created in value for an extended period. When you have too much money for the real value in an economy, the only option for an investor or a bank is to speculate. You can't just save because one of the things that caused the dollar bubble was below-market interest rates from the Fed. You can't buy stocks and bonds because they're the first place people go when they have extra cash, so they're already overvalued. The next place to turn was real estate - it's speculative, but it's "real" - so you're left with some kind of value if the bottom drops out. Unfortunately, a few percent of people missed the signs and bought high. But the majority of the people who will really lose were speculating, pure and simple. Slumlords, turn and burn mortgageers, loose banks, all looking to skim some of the extra cash and get out before the roof caved in.

Deflation is NOT the single biggest threat to our economy right now. It's the result of deleveraging good investments to pay off losses on margin in bad investments. You know, the way the market is *supposed* to bail itself out. I fear the wave of inflation that will come after it, due to all the extra cash the government will have to print to pay off its monstrous debts. And remember, it's the inflated money that got us here in the first place.

SukieTawdry writes:

muirgeo says: "Some of us look at the evidence and find the idea of doing nothing and letting the economy spiral deeper into recession chilling."

Agreed. So how about some real economic reform starting with a reduction in the second highest corporate tax rate in the world and a reduction, if not outright elimination, of the capital gains rate? If we're going to stimulate the economy, let's by God stimulate the economy.

Bob Layson writes:

There are descriptions and then there are names. If I call my old mutt Stimulus it won't cease being a dog.

The only real stimulus to the sales of any one producer are the outputs, priced for succcessful sale, of all other non-rival producers. The boot maker earns sufficient to buy bread from the baker.

If prices are right - including that of labour - then full employment, of labour at least, must occur and there is always enough money for prices to be set to sell most output at cost-covering prices.

Get prices right and the spenders will come.

Randy writes:

Heere Stimulus... here boy.

Good one Bob :)

Ian Duncan writes:

I thought that this analogy was a good one.

What I have not heard in all of this discussion about throwing money at the problem is the economic one. Yes its true that states have a long laundry list of projects that they would like to do, but there are really good reasons why they haven't funded them: mostly, they are projects whose value does not justify the cost. Politicians are (fortunately) somewhat restrained by the political process and state budgets, and they are forced to prioritize. So these are projects that the political process (read: democratic, or millions of us voting through our representatives) has determined that do not meet minimum requirements for funding. Now, all of a sudden, this "other" process allows the few hundred people in D.C. to allocate cash to projects that haven't passed muster in terms of ROI.

Thanks, but I want to make sure that projects are assessed and funding is allocated on a rational basis, and that projects that don't return sufficient value remain unfunded.

ecdski writes:

I stumbled onto this site via a link on NRO's The Corner, and this is by far the most clearly reasoned and articulated comment stream that I have ever encountered - seriously. I wish more statists would participate so that they could be educated, but it must be difficult to deal with the politely brutal repudiation of cherished ideas. And thank you for providing words and arguments to effectively defend my economic beliefs.

RJ writes:

HA.
Ecdski, I don't think a single one of my ideas has been refuted. The argument between MTN Goat and I came down to a philosophical disagreement about what the responsible role of government is in influencing the markets.

I think that because we live in a democracy, the government is merely a representation of the interests of the citizenry. It regulates when we want it to, and when the public demands less regulation, i.e. the Reagan era, we deregulate. The government is the most powerful tool the dispersed citizenry has to combat the self interest of profit motivated corporations. The government is a coutervailing power as outlined by Galbraith.

As to Bob Layson ridiculous argument, I can only respond that there is no legitimate reason for the World economy or the American economy to produce below full capacity, holding savings rate and the ilk constant. Recessions and Depressions are abberations that occur when markets force themselves so far out of equilibrium that the restructuring in one sector causes negative effects in another, which, due to positive feedback loops, causes the entire economy to depress. I think the clear lesson from this recession is that the financial sector is not self regulating, and left alone will spiral out of control. Current government regulation, little there is, was unable to prevent this from happening, necessitating a strengthening of government oversight.

I don't even understand this "get the prices right" conclusion. In what way are the prices for cars wrong right now? Or milk, or Oil, or shoes? THe only sector of the economy where prices were dramatically inflated were Oil, because of speculation of higher prices, and land, once again because of speculation reinforced by expectation. Both of those problems are ostensibly solved by now, yet the recession continues to deepen. How does this pattern of events fit your thesis?

TDT writes:

In (partial) defense of Allied WWI generals:

"I was reminded of the Battle of the Somme, one of the worst policy blunders of all time. Having experienced nothing but failure using offensive tactics up to that point, the Allies decided that what they needed to try was....a really big offensive. Just as Feldstein and Stiglitz pay no attention to the on-the-ground the housing market, the British generals ignored the impact of machine guns on men advancing over open fields."

This common perception ignores the facts on the ground in 1916. The Allies had tried flanking the Germans with a second front (Russia), and a third front (Gallipoli), and a fourth front (Caucasus), and a fifth front (Italy) and had failed miserably in all. They had initiated an effective naval blockade, with the idea that lack of essential raw materials would bring the Germans down, but the brilliant German scientists developed alternatives for all of these.

The Western front stretched from Switzerland to the sea, so there was no way to flank the Gernams here. The only alternative to apparently unending trench warfare, which itself resulted in many thousands of casualties each week, was a frontal attack. Since it had been thoroughly proven in the previous two years that small and medium size offensives were utterly ineffective, the generals planned a really big one.

The alternative to an offensive, continuing trench warfare, was politically unacceptable. Any senior general who told the French or British governments that an offensive was impossible would have been immediately fired and replaced by a general willing to plan the offensive. Any politician who told the French or British people that an offensive was impossible would have been quickly kicked out of office and replaced with a man "willing to fight." In effect, the decision to launch an offensive was made by the politicians, with the generals' input limited to where and how.

As it turned out, an offensive using the technology of 1916 WAS impossible. Hundreds of thousands of casualties resulted. The trench lines could be broken, it eventually turned out, but only with technology not available in quantity till 1918. The Germans used highly trained storm troopers with newly devised tactics. The Allies used mass tank attacks and, again, new tactics. But neither system was available in 1916.

Those who criticize the Allied mass offensives of 1916 as foolish should be required to explain in detail what their alternative strategy would have been, and why it would have been technically feasible and politically acceptable.

Pat writes:

A side issue I know- but the Somme achieved its primary objective of drawing German reserves away from the French, who were struggling from the effects of the German offensive at Verdun. I would like someone to explain what enemy we are trying to divert with our apparantly suicidal economic strategy though, and indeed what we are trying to divert them from: failing such information I'll assume they're as lunatic as they appear.

John S writes:

Been noodling on this today. Arnold you have a good point regarding the amount of money. Victor Davis Hanson had a similar note in that we should be discussing this massive amount of money in terms that use the words, "borrow" or "print". I think that many people don't really understand exactly one of those 500 bureaucrats with $1.5 billion will actually buy. I think we need some benchmarks such as: a 20 story office building in Dallas costs $50 million, a 100 mile stretch of inter-state highway costs $25 million, and so on. Then let the people get an idea that the bureaucrat with the $1.5 billion could build 25 or so 20 story buildings in Dallas.

Another thought is to make lemonade out of this stimulus lemon. We have recently heard about he vast amount of money that state and local government need in order to meet their future obligations. And, that obligation is going to come from the same taxpayers that are funding Obamas bailout/stimulus. Why not take a couple hundred billion of that stimulus and give it to the state and local pension funds? They don't need the money now, but they would invest that money and those investments would be in corporate bonds, and in municipal bonds. That way the money still gets put into the economy in a way that isn't vast consumption, but used to expand the credit markets and the capial markets. Looks like a win-win to me. The pension funds are solvent and the money is invested in growing the economy for the long term.

All Mi T writes:

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Ian Duncan writes:

Here is an example (from National Review Online) of projects that have been blocked in the past, but which may re-appear now that there are no longer limits on funding:

• A provision that takes about 8.8 trillion cubic feet of natural gas and 300 million barrels of oil out of production in Wyoming, according to the Bureau of Land Management. The energy resources walled off by this bill would nearly match the annual production levels of our two largest natural gas production states – Alaska and Texas.

• $3 million for a “road to nowhere” through a wildlife refuge in Alaska.

• $1 billion for a water project designed to save 500 salmon in California. At this price, each salmon would be worth far more than its weight in gold.

• $3.5 million to help celebrate the 450th birthday of St. Augustine Florida, in 2015.

• $4 million to protect livestock from wolves that Congress helped reintroduce into the wild.

• $250,000 to help bureaucrats decide how to designate Alexander Hamilton’s boyhood home.

• $5 million on botanical gardens in Hawaii and Florida.

I can't imagine enough individual tax payers agreeing to spend their own dollars on these projects.

Brett writes:

Recessions in a free market are like the tide.  It flows out and that is natural.  Sometimes with the sun and moon in alignment you get a particularly low tide.  It's easy to think that the water will never come back.  We could spend a lot of time and money pumping water onto the beach in vain.  The worst thing you can do is build a high wall off the shore in order to keep the tide from going out again.  This is foolish and would obviously prevent the tide from coming back in as is natural.  Patience. "Confirm thy soul with self-control."

K T Cat writes:

RJ,

Re: borrowing from the Chinese at low rates paying off over 50 years.

Who says rates will remain low over 50 years? If the debt rolls over into a higher rate, which it is guaranteed to do since that rate is currently 0, you're in worse shape. When there is no more money to borrow and you start printing money to cover the debt, what will happen to Treasuries? Won't people start to sell them?

Methinks you're gloating because you think the Treasury bubble can go on forever. They thought that about real estate, too.

Lee Jamison writes:

Muirgeo,

I would really like to know where contrarians like Mr. Kling think demand is to come from if not the government.
That is probably at one time the dumbest and most arrogantly stated piece of nonsense I have ever seen in a serious comment on an economic site. In your lead up to this comment you have stated yourself that-
Ultimately the money they are going to spend will be that which has accumulated disproportionately at the top because of 30+ years of rule changes favoring them at the expense of the large middle class.
So you claim the LACK of demand is the result of government, implying that government should get out of the way.

It is typical of people who insist on ultimate control that they will fix the damage done with government intervention with more government intervention. When I read Kling's article it seemed to me that is what he was complaining about.

You, Muirgeo, are simply making his point, perhaps even better than he did.

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