Machines can keep you breathing

A stimulus won’t save us. We’re already spending significantly more than is good for our economy.

Whenever the government spends money, whether in an attempt to spur economic growth or not, that money has to come out of the economy somehow. Either the money is raised through taxes and taken directly out of the economy, or the money is borrowed and ties up money that would otherwise be invested in new business growth (and then hits again harder when it has to be paid for with taxes), or the money is printed and causes inflation, driving down the purchasing power of consumers and reducing their economic activity.

That’s not to say that all government spending is bad, but there is an upper limit to how much spending is good for an economy, especially if that money is being spent in an attempt to stimulate further growth. Most government spending is inefficient from the standpoint of creating economic growth. Some government services, such as providing transportation and education, enable more economic activity than they detract, up to a point. When government builds a highway between two cities that were not connected, the new economic activity from goods, services, tourism, etc. moving from place to place is often more than enough to cover the cost of the highway. However, when we start building 400 million dollar bridges to small towns with no major industry, the new economic activity created is significantly less than the amount that goes into creating the bridge. Spending money on education helps train new workers and is beneficial when we spend that money efficiently; when we have the federal government trying to operate on top of state governments, each with their own bureaucracy, where state and local school districts spend as much money trying to meet arbitrary federal standards as they receive from the federal government, we wind up wasting a lot of money and spending far more than it should take to provide a sufficient education.

Nor will quantitative easing save us. We’ve already been following inflationary quick-fix methods for the past decade as interest rates have been repeatedly dropped.

It’s a nice idea that inflation spurs investment and job growth, and in the short term it can do that. However, long term, inflation does far more to destroy job growth than deflation.

Inflation often happens naturally when we have a strong economy. When people have more money, they are willing to spend more, and when people have less, they are willing to spend less, so inflation often appears slightly higher during economic booms while deflation often happens as a result of bubbles bursting and recessions setting in. This does not mean inflation is a cause of strong economies, or that deflation is a cause of weak economies; a strong or weak economy causes a certain level of inflation or deflation, which is then modified by other factors. When inflation happens based on economic growth, inflation is generally negative; it prevents people from buying as much value worth of goods and services for the same amount of money, and serves to dampen economic growth. When deflation happens based on economic decline, it is generally a positive, allowing people to buy more value worth of goods and services for the same amount of money and dampening the negative impact of economic decline.

When inflation is caused by printing money, reducing interest rates, or increasing the percentage/multiplier of funds on hand that banks are allowed to loan out, we see a different effect. The new currency being injected into the economy spurs investment in new industries almost immediately as the currency becomes available. However, as that currency reduces the value of the currency held by consumers, and reduces the purchasing power of people on fixed incomes and salaries with limited growth potential, it reduces economic activity by preventing people from purchasing the same value in goods and services. In addition, because people are able to save less (and have less incentive to do so), there is less currency available to invest, forcing government to create more inflation to keep the investment happening to counteract the decrease in purchasing power and savings available to loan which is being caused by inflation.

When deflation happens based on fluctuations in the money supply, such as would happen if we switched to a gold standard, the opposite happens. We see an immediate drop in investment and even job creation due to a tightening of the money supply. However, the resulting deflation allows people on fixed incomes and salaries with little growth potential to purchase more while still putting more aside for savings, you see an increase in economic activity which helps to counteract the reduction in investment, and over time you see far more money put into savings and made available to be loaned out and invested in new business enterprises. While a high rate of deflation has the potential to cause a severe enough recession to make it difficult for an economy to recover, a slow and steady rate of deflation will cause more than enough long term growth to be worth the negative short term effects.

Considering that we got ourselves into this “great recession” by an entire decade of short term economic practices like defecit spending, cutting interest rates, and encouraging excessive loaning and borrowing, we need a long term solution, not a short term solution. We need the type of government that a Ron Paul or a Gary Johnson would provide, a government where we would cut the 43% of the budget that we’re currently borrowing because our spending has exceeded revenue and where we would move to sound currency, restore both investor AND consumer faith in our economy, and cause long term job growth through sound economic policies rather than jumping from one quick fix to the next until we’re in a hole so deep we can’t dig ourselves out anymore.

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About kiraisjustice

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2 Responses to Machines can keep you breathing

  1. John Maynard Keynes says:

    Congratulations on your first blog post! Unfortunately, you are mistaken.

    Imagine an economy where all prices were fluid, changing minute-by-minute, and there were no stable long-term relationships between economic agents. Imagine that “Bob Roberts’ labour-power” was a commodity traded on an exchange just like “Light sweet crude.” Instead of having a job, John Q. has a little widget on his computer screen that tells him who the current top bidder for his labour-power is.

    If a source of demand disappeared from this economy — a housing bubble, say — all that would happen is that some people would be worse off, some people would be better off, some prices would be higher and some lower. But the overall level of economic activity would not change.

    But that is a crazy fantasy economy. In the real-world economy, prices do not change instantly, behaviour does not change instantly in response to circumstances, and so on. John Q. does not have a “labour ticker” on his computer screen, he has a steady job. It is very difficult to reduce his wage at this job — partially for reasons of contract, labour unions, and regulations, but mostly for reasons of human psychology.

    This creates the possibility of something called a “recession.” This happens when a source of demand disappears from the economy — such as the collapse of a housing bubble. Because prices are “sticky,” the economy does not instantly adjust. Perfectly employable people lose their jobs. Perfectly useful factory machinery sits idle.

    The normal response to a recession is basically printing money. Make sure the banks have lots of money available, they go looking for investment opportunities, such as finding Bob a job working those machines that were idle.

    But for technical reasons that are subject to an incredibly confusing debate, this doesn’t work all the time. If the hole in the economy is big enough, you may not be able to fill the hole in the normal way. The banks won’t lend out money no matter how much you relax their lending conditions.

    In this case, you have the government act like a bank, and make investments directly, itself. This is called “fiscal stimulus.”

    But wait, you say! The money has to come from somewhere. If the government borrows money, then someone else doesn’t get a loan. If the government prints money, that dilutes the value of everyone else’s money (because more money is chasing the same amount of productive resources.)

    But this is not true, for the reasons I have just explained. In a deep recession, potentially loanable money is not getting loaned out. Potentially productive resources are not being used for production. Fiscal stimulus does not divert resources from the private sector; it mobilizes resources which were previously idle. It increases the overall level of economic activity.

    • Funny how your post does nothing to respond to any of the points I made, and your straw man argument about an instantaneous economy ignores the fact that the majority of my post is based around the long term and short term effects of inflationary and deflationary policies.

      For all your talk about policy during a recession, there is a limit to how much stimulus spending will actually help an economy. Not all spending projects are created equally. Attempting to use stimulus spending to pull an economy out of a recession is a losing idea. Each individual item government can spend money on is going to have a different return for the amount of money put in. Some projects will see a significant return, such as transportation between two major cities, which will increase trade. Other projects will see a much less significant return.

      Some of the largest attempts at stimulus spending during and immediately preceding the current recession had horrible returns. Corporate welfare has possibly the worst record as far as a return on our investment as any government spending can get. Taking a company or an industry that is failing to make a profit because they are unable to make a product that a significant number of people need and sell it at a price that is not only affordable to consumers, but competitive against alternatives, and taking money out of more productive areas of the economy through taxation or preventing loans to new businesses by borrowing money to give to these failing businesses simply results in those businesses or that industry continuing to fail while other sectors of the economy deteriorate due to higher taxation and a lack of new enterprise.

      Keynes’ greatest mistake was thinking that government spending could generally produce a greater than 1 to 1 return in economic growth. The number of situations where government spending can create more wealth or value than it destroys are severely limited, and those opportunities do not increase simply because we enter a recession. Even if the alternative to borrowed stimulus spending is that some of the economy’s value has to sit on itself while the economy readjusts, that is a far better alternative than simply throwing money at the problem when doing so destroys more value than it creates.

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