Cafe Hayek - Latest Comments in Macro question

Re: Macro question

D. Watson — Mon, 12 Jan 2009 10:56:03 -0000

One incorrect item in some people's analysis here is the assumption that every person who receives $2500 will later be taxed $2500. Most of this will eventually be paid for by the richest citizens. The poorest receive $2500 and will not be taxed later (or at least certainly not to the tune of $2500), the middle group will receive $2500 and pay back, say, $500, while the upper tax brackets will pay the balance. Thus only the rich will have an incentive to save it all a la Ricardian equivalence. If you believe in the more strongly worded versions of the Laffer curve, this would have a total negative on "the economy" unless you think the spending multipliers of the poor are sufficiently large. (I confess I haven't met anyone who believes both.)

I confess I haven't read EVERY comment, so I don't know if someone eventually pointed this out. If I was beaten to the punch, I apologize.

Re: Macro question

Bill Woolsey — Thu, 08 Jan 2009 05:03:16 -0000

So far, the answers are quite poor.

Generally, "stimulate" refers to increased spending (nominal) on final good and services.

Because all three programs are financed by borrowing, the question is whether or not increased government borrowing reduces the demand for money. That is, if it somehow causes people to hold less money than they otherwise would. If people hold new government bonds in place of existing money balances, total spending might rise.

If there is no offsetting change in the quantity of money, reduced money demand creates a surplus of money and increases total spending in the economy. It "stimulates" the economy.

If the price level is currenty at equilibrium, the result is monetary disequilibrium, that will cleared up in the long run by a higher price level.

If the price level is currently above equilbirium, then the policies will move the equilibrium price level towards its existing level, moving the economy towards equilibrium. In this situation, the incease in government bonds and reduced demand for money can increase total production and employment in the short run.

There are two issues that would divide economists. One is the degree to which government bonds can substitute for money. This was traditionally debated in the context of the interest elasticity of the demand for money. If the context of the question is now, then how does the unusual situation of the interest rate on short government bonds being only a few basis points impact the situation.

A second element of division among economists is whether or not the price level is always at equilibrium, or is it possible for it to be above equilibrium in the short run. This discussion has been traditionally in the context of the short run phillips curve.

All three programs will likely impact the allocation of resources.

Number 1. will likely shift resources from investment to consumption, reducing real income and welfare in the long run. Other things being equal, the lower income implies a higher price level in the long run. If everyone is a perfectly informed rational mazimizer, this won't happen.

Number 2. will reduce real income and welfare compared to the alternative approaches.

Number 3 will shift resources from current consumption and private investment to a set of particular infrastructure projects. The impact on future production and welfare depends on on the productivity of the investments choosen.

Bonus--

If the goal is to stimulate the economy, any of these approaches should be combined with an increase in the quantity of money--that is, they should be financed by money creation.

Re: Macro question

Another_Brian — Wed, 07 Jan 2009 11:30:49 -0000

I wish to modify my original answer to the first question. There is a way the first option could stimulate the economy: write the legislation for this $2500 "tax rebate" so that it's not distributed as checks, cash, or debit cards, but as gift cards that can only be used to purchase pitchforks, torches, rope, and transportation to DC. Perhaps additional stipends could be included for tar, feathers, cattle prods, etc.; firearms might be a little too controversial.

This could be like the angry mob version of food stamps.

This also modifies my answer to the extra credit questions. Combining 1 and 3 would provide less money for the angry mob, but the infrastructure improvements may make it easier for everyone to get to DC without too much traffic.

I would still expect the macroeconomists to disagree, but you might be able to get a few more on board given their penchant for creative destruction. In that regard, it's somewhat similar to the second option of digging a bunch of holes which most of the macroeconomists seem to favor.

Re: Macro question

Martin Brock — Wed, 07 Jan 2009 08:02:19 -0000

The cost of materials for bridges, sewers, etc. is really high. I'd think you'd spend twice as much on materials as labor in a project like that.

Where do the materials come from? Someone mines the limestone and mixes the cement, and people manufacture machinery for these purposes. Labor is most of the cost of everything except the rawest of raw materials.

Congress could also pay people to build more houses, but we arguably have too many houses already. "Infrastructure" and other public goods are valuable only insofar as they add sufficient value to other productive endeavors, but with no market to calculate this value, it can be difficult to gauge.

Suppose we have a lottery. Winners receive anywhere from a million to a hundred million dollars, but they may not simply consume it. They must invest it, and by "invest", I don't mean buying "securities".

Winners incorporate. Congress owns 90% of each corporation's shares, and the winning founder owns the other 10%. The corporations purchase means of production, including labor, and produce goods for sale. A corporation may pay its founding winner a salary limited by law. After five years, if a corporation has a market value, Congress sells its shares; otherwise, it dissolves.

Taxpayers might lose more than it gains this way, but at least we'd know what we lost and how we lost it, and we'd also know what we gained and how we gained it. With "infrastructure", we only know that the bridge is out there and crossed occasionally. Since no one pays to cross, we don't know much about the value of the crossings.

Re: Macro question

Ike Pigott — Wed, 07 Jan 2009 07:46:42 -0000

No one has mentioned that by hiring 10,000,000 people at taxpayer expense, we are also artificially jacking up prevailing wages by removing competition for jobs. This added expense will further harm overall productivity, and lead to cloudy market signals on top of the inflation caused by borrowing.

Re: Macro question

Sam Grove — Tue, 06 Jan 2009 20:58:55 -0000

The purpose of government stimulus is to redistribute stimulus in such a way as to produce visible effects while the unseen effects are ignored or blamed on the usual suspects.

There is always stimulus. The profit motive stimulates people to engage in productive behavior. The reduction in this area will be the unseen effects .

Re: Macro question

ScooterC — Tue, 06 Jan 2009 09:09:17 -0000

I don't think #3 is a $750 billion option. The cost of materials for bridges, sewers, etc. is really high. I'd think you'd spend twice as much on materials as labor in a project like that. There's been quite a bit of discussion of "the government's cost of capital", but what about the cost of materials? What country's economy would we really be stimulating by buying all that cement and steel?

Re: Macro question

Bill — Tue, 06 Jan 2009 08:57:54 -0000

The notion that peoples' saving a rebate check dampens the stimulative effect of such checks seems odd to me. Saving is not necessarily the same as hoarding (e.g., placing the check under a mattress or otherwise removing the purchasing power from circulation.) If I save my check by depositing it in a financial institution, and that institution, in turn, lends the money to someone else who makes a purchase, how is that any less stimulative than if I spend the money?

Re: Macro question

OnlyShawn — Tue, 06 Jan 2009 08:22:34 -0000

1,2,3: stimulus FAIL.

(see: unseen, a la bastiat)

Re: Macro question

Xmas — Tue, 06 Jan 2009 07:52:32 -0000

All three are pointless if this isn't a shift of existing government spending. If this is "spending" on top while keeping other spending the same, then this is really poor.

Though, building infrastructure would be a nice thing for the government to ACTUALLY spend money on.

Re: Macro question

Oil Shock — Tue, 06 Jan 2009 07:52:00 -0000

Bret says....

most economists seem to abhor empirical evidence.

What are you smoking? All mainstream economists can quote statistics to support their own selfish agenda. It is easy to take up position on any economic matter, for or against, based on statistics. Only the HETERODOX Austrian school insists that you need theory to interpret data, and not develop theory to suit your data.

Re: Macro question

Mike — Tue, 06 Jan 2009 07:47:14 -0000

First let me put aside any moral concerns about whether or not the government OUGHT to borrow to stimulate. Let stimulative mean productivity higher than would have otherwise occurred. From a purely theoretical standpoint of CAN they stimulate, I think the answer is a qualified yes.

Option 2 can never be stimulative because holes full of dirt do not earn a rate of return above the government's cost of capital.

For option 3 to be stimulative, the following we need to be true: 1. There exist projects that the government could undertake that would earn returns in excess of their borrowing costs. (even accounting for cronyism, etc.) 2. Private borrowers will not undertake these profitable projects due to IRRATIONAL fear about their future returns or IRRATIONALLY high costs of capital from private lenders.

Under these conditions, government borrowing could stimulate real productivity gains i.e. not just create future inflation or tax increases.

Option 3 could stimulate in an extremely unlikely or roundabout way. 1) Gov't borrows from entities unwilling to lend to ANYONE else 2)People use check to pay down debt 3) Private lenders who were previously fully constrained by their balance sheets use the newly created excess lending capacity to fund capital projects for which there was demand for funds but no previous private supply.

Doubt this could occur.

I believe there are two major macroeconomic disagreements: 1) The degree to which you believe that liquidity traps are possible AND that the Government could earn its cost of capital when no one else is able or willing to try. 2) The degree to which this type of behavior is morally desirable or acceptable or even at all desirable from a more long run moral hazard type view of the future behavior of all economic actors.

Re: Macro question

Oil Shock — Tue, 06 Jan 2009 07:46:48 -0000

If dissipating wealth through options 1, 2 & 3 is what stimulated the economy, Soviet Union will still be around and will be the lone super power. North Korea would be a paradise. Cuba will build walls around it to stop Floridian refugees.

All the poor socialist nations in Africa, Central America or Asia can become so unbelievably wealthy by spending themselves to prosperity.

Oh, What a wonderful fantasy!

Re: Macro question

John Dewey — Tue, 06 Jan 2009 07:42:57 -0000

Way back in January, Russ suggested that Americans would be hesitant to spend a rebate check. He offerred that Americans might save the rebate, knowing they would eventually have to pay it back in higher taxes. I was not convinced:

"I have great respect for Professor Roberts also, but I disagree with his suggestion that families will not spend the windfall. Many of my lower middle income relatives will spend their share before it ever gets to them.

Since then I've become more convinced. Most Americans pay little if any income taxes. If they even consider that rebates must be repaid - my relatives have no clue about that - they likely believe that only the rich will be burdened with repayment.

Are rebates a simple redistribution? It seems to me we will be increasing demand in period 1 and reducing demand in periods 2, 3, 4, etc whenever taxes must be raised. I'm not sure that smoothing economic activity should be a function of government, but isn't that what the rebates accomplish?

Re: Macro question

Adam Malone — Tue, 06 Jan 2009 07:32:56 -0000

Short answer: Governments do not have the power to stimulate economy. The have the ability to decrease their negative impacts on the economy, but apart from enforcement of contracts and rule of law, government's ability to stimulate the economy is non existent.

As stated above, they simply shuffle money from one group to another. What many do not consider when discussing the government's efforts to redistribute wealth is that it is by definition an inefficient mechanism. When the government takes $100 from me to give to someone whose need is "greater" they do not give $100 worth of assistance to the person. The IRS has to account for the money, the treasury department has to send it out, etc.

Every step of the way a small portion of that money is eaten away due to administrative costs.

So, if the government takes my $100 (or get's a loan and makes my child pay for it later on) and goes to build a road with it I will not only be forced to spend my money on something unnecessary to me, I will actually get LESS than $100 worth of goods (be they bridges, roads or widgets). Talk about a raw deal.

Re: Macro question

Adam Hengels — Tue, 06 Jan 2009 07:08:01 -0000

Could #1 stimulate simply because the government's cost of borrowing is cheaper than the individual taxpayer's opportunity cost of capital? (aside from all the distortive effects) Thus, if individuals invest their tax savings in private enterprises, growth will be faster than otherwise, as long as the government's credit rating is not reduced in the process. Or is there more to it?

Re: Macro question

Randy — Tue, 06 Jan 2009 07:06:24 -0000

Dave,

Just an aside, but I recently had the opportunity of driving on the northern part of the beltway. Beautiful roads. I was thinking while creeping along in the bumper to bumper traffic that this probably looked really good on paper.

Re: Macro question

Martin Brock — Tue, 06 Jan 2009 07:03:56 -0000

Public goods contribute to many productive organizations, but no organization can effectively own one without creating excessively restrictive monopoly; therefore, production and organization of the goods for profit is not possible or counterproductive. These goods certainly exist in theory and in practice. Roads are classical examples. Knowledge from research is too. 3. potentially creates public goods.

The problem with public goods is that politicians can and will call anything they like a "public good" whether or not it contributes much value to any productive organization. When aggregate demand is insufficient to employ idle resources, taxing or borrowing to creating public goods can be useful in principle, but other approaches are possible. A monetary authority may extend credit to organize idle factors. The typical object to this approach is that "no one is willing to borrow", but "no one" in this formulation typically describes some existing corporatist structure already laden with debt.

Let me incorporate, and I'll try to organize a few idle factors profitably in a year or two. Expect me to gamble my children's food, clothing and shelter, or even my minimal support in old age, on the organization, and I won't. People like me are never in short supply. Only the credit can be in short supply. Extending it without putting the borrower much at risk can be counterproductive, but this approach is probably more productive than extending the credit to politicians creating "public goods".

Re: Macro question

Dave Peterson — Tue, 06 Jan 2009 06:53:29 -0000

Don't you need to know what rate government is borrowing at? Theoretically you could build or improve infrastructure that could provide a return greater than what you borrowed it at. I know if I spent less time stuck in traffic around DC I'd be richer (and probably even richer to the point that I'd save more in gasoline and car maintenance than my share of the added tax burden of those jobs). But I also know that these stimuli don't work that neatly and efficiently in practice.

Re: Macro question

Chris — Tue, 06 Jan 2009 06:48:35 -0000

#2 and #3 are anti-stimulus. If the idea of "Stimulus" is to help the economy do better in the future, then having a bunch of people go out learn to be the equivalent of wig-powderers (a trade which has no future) is the wrong way to go about it.

Among all these, I would prefer #1 because, apart from the marginal governmental waste in printing checks, it has no effect.

Re: Macro question

Rob Dawg — Tue, 06 Jan 2009 06:39:45 -0000

Option 3 has the possibility of being even more anti-stimulus than the first two. Infrastructure comes with carrying costs. In the case of infrastructure like rail transit projects the ongoing operating subsidies will continue to drain resources long after the project is completed.

Re: Macro question

Bill — Tue, 06 Jan 2009 06:18:04 -0000

It is assumed that all three are financed by borrowing. I recall a clever fellow writing that these are analogous to dipping water out of one end of a pool and pouring it in the other end.

Re: Macro question

Bill Nelson — Tue, 06 Jan 2009 06:16:53 -0000

1. This sounds like a $2500 loan to every American -- from every American. Out of my right pocket and into my left. Plus transaction costs. Sounds like a bad deal.

2. This shifts property from some people to some other people, and it's pernicious because the new ditch diggers will no longer be producing anything of value. Furthermore, in the long run, the tax burden will discourage non-ditch diggers from producing, and wealth further diminishes.

So far, I prefer #1 because at least people are not taken away from productive jobs.

3. This is very similar to #2 in that much of the money will be directed to things that no one wants. But at least some value is created by building bridges. Perhaps those resources could have been put to better use, but at least it might not be a total loss.

I don't know what the effects would be on economy "stimulation" as I have no idea what the phrase "stimulate the economy" even means.

It sounds pretty distasteful, though.

Re: Macro question

Bret — Tue, 06 Jan 2009 06:04:21 -0000

1: Depends.

2: Depends.

3: Depends.

1 & 3: Depends. Same effect.

Extra extra credit: Wouldn't agree. Economists never agree on anything. Empirical evidence? We're talking economics here - most economists seem to abhor empirical evidence.

Re: Macro question

SheetWise — Tue, 06 Jan 2009 06:04:13 -0000

Option 1 is giving Peters money to Paul. No change.

Option 2 is giving Peters money to Paul while punishing Paul. A lot of wasted effort.

Option 3 is creating wealth -- but is very inefficient.