Thursday, January 29, 2009
Martin Feldstein Opposes This Stimulus
This article by Feldstein--who calls himself a conservative economist--is breathtaking. I am not kidding, I don't see how someone could have written an op ed opposing the current stimulus bill, that would have annoyed me more. I truly think by the end of it, my jaw had dropped. (HT2MR) Here's the part where he shows we're all Keynesians now; but you must read the whole thing to see just how awful it is. ("Awful" if you aren't a fan of the government, I should clarify.)
Start with the tax side. The plan is to give a tax cut of $500 a year for two years to each employed person. That's not a good way to increase consumer spending. Experience shows that the money from such temporary, lump-sum tax cuts is largely saved or used to pay down debt. Only about 15 percent of last year's tax rebates led to additional spending.
...
Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? In that way, the same total tax reduction could produce much more spending and employment.
Comments:
Bob,
Why hasn't any critic of the stimulus mentionned the obvious flaw in the debate over spending vs. tax cuts:
Keynesians say: «tax cuts are a bad idea cause people will save».
Fine. But do they really believe that newly employed workers on temporary projects in the middle of a depression will take their paycheck and go buy a new car?? I see no reason to believe that spending on projects will generate more employment than tax cuts.
It baffles me that none of you austrians pointed out this obvious flawed assumption, which is the foundation of the so-called multiplier and the whole keynesian theory.
Why hasn't any critic of the stimulus mentionned the obvious flaw in the debate over spending vs. tax cuts:
Keynesians say: «tax cuts are a bad idea cause people will save».
Fine. But do they really believe that newly employed workers on temporary projects in the middle of a depression will take their paycheck and go buy a new car?? I see no reason to believe that spending on projects will generate more employment than tax cuts.
It baffles me that none of you austrians pointed out this obvious flawed assumption, which is the foundation of the so-called multiplier and the whole keynesian theory.
# posted by 
: January 29, 2009 at 2:56 PM
: January 29, 2009 at 2:56 PM
Let me ease your bafflement: The Keynesians are counting the first round of the injection as 100% spending, and then from that point the tax cut vs. gov't spending would proceed on an equal footing.
I.e. whatever the "propensity to consume is," you get more spending (in a Keynesian view) if the gov't spends 100% of that initial injection.
I.e. whatever the "propensity to consume is," you get more spending (in a Keynesian view) if the gov't spends 100% of that initial injection.
David,
I would say that the obvious problem with their analysis is that savings akin to burying the money in the backyard. When we save, money is put into banks, which then lend it out.
If GM borrows money they don't just sit on it. They spend it. Somehow this spending, to the Keynesian mind, is inherently inferior to government spending. It does nothing to "stimulate" because it's just moving money around.
Sure, the banks aren't lending just yet, but they will be as soon as they realize things aren't getting dramatically worse. Then the avalanche of cash at their disposal will flood the market.
I would say that the obvious problem with their analysis is that savings akin to burying the money in the backyard. When we save, money is put into banks, which then lend it out.
If GM borrows money they don't just sit on it. They spend it. Somehow this spending, to the Keynesian mind, is inherently inferior to government spending. It does nothing to "stimulate" because it's just moving money around.
Sure, the banks aren't lending just yet, but they will be as soon as they realize things aren't getting dramatically worse. Then the avalanche of cash at their disposal will flood the market.
The Blackadder Says:
The fact that Keynesians count 100% of the government payments as spending just makes the whole enterprise that much more fraudulent, IMO. If the government were to give me a $10,000 tax rebate, then only the part of this rebate that people go out and spend gets calculated as part of the multiplier. But if the government were to simply reclassify this as a payment (say, for thinking happy thoughts), then it could count the entire $10,000 as spending plus the portion of the $10,000 that I go out and spend.
Granted, in the typical case the government isn't going to be paying people just to think happy thoughts, or dig holes and fill them up, or whatever. So a Keynesian could argue that the fact we got something of value for the $10,000 means that it should be counted. Maybe the government paid people to build a bridge, and this increases productivity by $10,000, blah blah blah. But if the bridge really was worth $10,000, then you don't need to appeal to the multiplier as a way of justifying it. The only way Keynesian arguments come into play is if the bridge really isn't worth what the government is paying for it, so that you need to appeal not only to the fact that you have the bridge, but also to the supposed multiplier effect of the spending. But in that case, counting the entire $10,000 as if it were just an ordinary case of spending significantly overstates the effect that the spending has.
The fact that Keynesians count 100% of the government payments as spending just makes the whole enterprise that much more fraudulent, IMO. If the government were to give me a $10,000 tax rebate, then only the part of this rebate that people go out and spend gets calculated as part of the multiplier. But if the government were to simply reclassify this as a payment (say, for thinking happy thoughts), then it could count the entire $10,000 as spending plus the portion of the $10,000 that I go out and spend.
Granted, in the typical case the government isn't going to be paying people just to think happy thoughts, or dig holes and fill them up, or whatever. So a Keynesian could argue that the fact we got something of value for the $10,000 means that it should be counted. Maybe the government paid people to build a bridge, and this increases productivity by $10,000, blah blah blah. But if the bridge really was worth $10,000, then you don't need to appeal to the multiplier as a way of justifying it. The only way Keynesian arguments come into play is if the bridge really isn't worth what the government is paying for it, so that you need to appeal not only to the fact that you have the bridge, but also to the supposed multiplier effect of the spending. But in that case, counting the entire $10,000 as if it were just an ordinary case of spending significantly overstates the effect that the spending has.
# posted by : January 29, 2009 at 4:40 PM
: January 29, 2009 at 4:40 PM
I'm with you, Bob_Murphy. But I don't see how Feldstein is that much different from either mainstream position on the stimulus. Rather, for me, the whole topic is infuriating. There are very deep and very wrong misconceptions about economics, and even a lot of libertarians will implicitly agree with some of that when refuting a point, when they don't need to.
I mean, look at what we have here. This is my attempt at a thought trace of Feldstein:
"Okay, economy's not so good. How can we turn it around? Let's see, there are a lot of people deep in debt. Now, I'm going to need a solution that *doesn't* make these people pay down the debt. See, they need to stay in debt and spend on unnecessary stuff. Cause if they don't, things will just get worse. Because our economy depends on people spending all they have and then borrowing to consume even more. And because the economy is predicated on that activity, we should ... encourage it! I don't think I made an error at any point in getting to the conclusion that persistent indebtedness is good. I will not conclude that the economy should be reoriented so it doesn't depend on consumer stupidity.
I mean, look at what we have here. This is my attempt at a thought trace of Feldstein:
"Okay, economy's not so good. How can we turn it around? Let's see, there are a lot of people deep in debt. Now, I'm going to need a solution that *doesn't* make these people pay down the debt. See, they need to stay in debt and spend on unnecessary stuff. Cause if they don't, things will just get worse. Because our economy depends on people spending all they have and then borrowing to consume even more. And because the economy is predicated on that activity, we should ... encourage it! I don't think I made an error at any point in getting to the conclusion that persistent indebtedness is good. I will not conclude that the economy should be reoriented so it doesn't depend on consumer stupidity.
Bob,
You gotta check out this little item that was on the Guardian online today:
http://www.guardian.co.uk/business/dan-roberts-on-business-blog/interactive/2009/jan/29/financial-pyramid
It starts out with a decent explanation of fiat currency and fractional reserve and ends with a pure-nonsense picture of the present crisis.
It basically ends with the claim that two trillion in stimulus wouldn't be nearly enough...and if people stop spending money, it will literally be the end of the world.
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You gotta check out this little item that was on the Guardian online today:
http://www.guardian.co.uk/business/dan-roberts-on-business-blog/interactive/2009/jan/29/financial-pyramid
It starts out with a decent explanation of fiat currency and fractional reserve and ends with a pure-nonsense picture of the present crisis.
It basically ends with the claim that two trillion in stimulus wouldn't be nearly enough...and if people stop spending money, it will literally be the end of the world.
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