Cafe Hayek - Latest Comments in Stimulie, I

Re: Stimulie, I

Saum — Wed, 23 Jan 2008 08:22:31 -0000

I am more inclined to believe that what John Dewey and others have said abt spending v saving is correct. Otherwise why would we have those pacyheck advance loan guys around? We are a spend and more spend people!

Re: Stimulie, I

Martin Brock — Wed, 23 Jan 2008 06:18:38 -0000

Martin:

In principle, creating money to spend it could have net benefits to the economy. For example, the spending could employ otherwise idle resources building needed roads increasing the productivity of the rest of the economy. In this scenario, the spending need not be inflationary, even if government creates money from nothing to spend it.

andy:

Martin, could you explain why those resources are idle before the money was created? If it was so, lowering prices of these resources would have solved the problem as well - without the side effects of expanded money supply.

I don't know why the resources are idle.

I do know that freely accessible, paved roads can raise productivity, and I know that human beings aren't born paving roads. We can have too many roads, of course, and simply throwing money at roads is no panacea, but I'd rather throw money at roads than throw it at bombs. That's just a personal preference of mine.

Lowering prices doesn't automatically employ resources. The price of salt water on the coast is practically zero, but we don't have "fully employed" salt water. At some point, lowering prices may only increase the supply of cheap stuff that no one wants.

Here's a real example. My neighborhood has a derelict house. Apparently, it had a bad roof that no one ever fixed, and water damage ultimately destroyed the house beyond repair. Now, the house is condemned, but no one will demolish it. Why? I'll venture a guess. The cost of demolishing the house and clearing the site exceeds the value of the land underneath. In other words, the real value of the property is now negative, so no one will own it. I wouldn't accept the property if you gave it to me for nothing.

This sort of thing does happen, and it's not simply an artifact of monetary policy. If the value the land doesn't change relative to the value of clearing the site, the real value of this property remains negative indefinitely, regardless of nominal prices. Maybe, removing the derelict house would increase the total value of many surrounding properties enough to justify the cost, but I'm not willing to absorb the entire cost myself, because I can't afford this charitable contribution to my neighbors, many of whom are probably richer than I.

A gold standard and gradual deflation doesn't solve the problem, and deflation does create other problems. Some of the problems are simply accounting difficulties. We could adapt accounting procedures to persistent deflation. We could negotiate long-term lease agreements with gradually falling rents for example, but as a practical matter, most landlords can't wrap their heads around these terms. They'd rather gradually raise rents instead.

Re: Stimulie, I

vidyohs — Wed, 23 Jan 2008 06:16:45 -0000

Just an aside, but if this nation went back to the gold standard to prevent inflation, would it not then be forced to use only coins of silver or gold and eliminate all paper certificates?

As long as we accept that the government can print paper certificates redeemable for precious metal, the government can still inflate.

What is being pledged as redeemable by those FRNs is the value of our individual labor, because the FRNs themselves are nothing more than instruments of debt. that is the reason they are called notes, as in Federal Reserve Notes.

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Anyway,

Muirduck, my response in the debate on the topic you chose is available to you on the previous Stimulus thread. Ball's in your court.

I am off again to practice my beloved capitalism.

Re: Stimulie, I

John Dewey — Wed, 23 Jan 2008 04:21:12 -0000

andy: "Martin, could you explain why those resources are idle before the money was created? If it was so, lowering prices of these resources would have solved the problem as well"

I think the goal of Congress and the president is to limit the human resuorces that become idle. A recession will lead to lower utilization of labor. The first effect of the subsequent recovery would be increased productivity, as output increases but laid off employees remain idle. If an economic stimulus reduces the layoffs, then the total months of idle labor resources should be lower. That's the pain Congress and the president are trying to reduce.

Highly trained economists cannot agree that such a stimulus will work. Bernanke, who is much smarter than I am, favors a quick fiscal stimulus:

The Fed chairman said a stimulus plan of $50bn-$150bn would be “reasonable” adding that the right stimulus plan would have a “measureable” effect on growth.

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Mr Bernanke endorsed the view – associated with prominent Democrats – that targeting relief at low to middle-income people would deliver the most “bang for the buck”.

Bush and Bernanke back fiscal stimulus

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.

Re: Stimulie, I

John Dewey — Wed, 23 Jan 2008 04:03:03 -0000

Oregonguy: "What have we done with the dough? The billions? Gone to St. Louis, Missouri. Textile mills in China. Spun through retail land and nothing to show for it. Brilliant economic policy."

I don't know if it is brilliant economic policy, but very little of what is spent will go to textile mills in China. The production cost of most goods sold at Walmart is very low. A larger portion of what is spent at Walmart goes to the transportation network which moves goods from China across the ocean, over rail to Walmart distribution centers, and then over highways to the individual stores. Another big part of what one pays for Walmart products goes to the employees of Walmart. The transportation companies and their employees, together with Walmart and its employees, will then spend most of what they receive right here in the U.S. The ripple effect of spending those billions on consumption should immediately increase economic activity - which is what Congress and the president are hoping for, right?

I'm not arguing that creating money to stimulate the economy will make the economy healthier over the long run. Of course it won't. But the additional spending will probably reduce the immediate shrinkage of the economy.

Re: Stimulie, I

andy — Tue, 22 Jan 2008 22:18:39 -0000

I'm having trouble understanding why the "stimulus" package to individuals is any different then the Fed pumping billions of new money into the system to save Wall Street and the lending institutions.

I have to agree with Muriego. Since the government doesn't plan to cut spending but only to cut taxes - thus finance the whole thing with the deficit, there seems to be not much difference between the 2 options.

In principle, creating money to spend it could have net benefits to the economy. For example, the spending could employ otherwise idle resources building needed roads increasing the productivity of the rest of the economy. In this scenario, the spending need not be inflationary, even if government creates money from nothing to spend it.

Martin, could you explain why those resources are idle before the money was created? If it was so, lowering prices of these resources would have solved the problem as well - without the side effects of expanded money supply.

Re: Stimulie, I

brotio — Tue, 22 Jan 2008 20:17:53 -0000

"Not really Bro since Saddam DID NOT attack us on 9-11, had NOTHING to do with any 9-11, WAS NOT a supporter of Al Queda and there was NO significant Al Queda in Iraq until after we invaded. No parallel universe needed just attention to the details and the facts and most importantly having another source for your information then Fox News." - Murthaduck

I know, I know. I should get my information from such reputable sources as CBSnooze, Clinton News Network, or the NY Slimes.

Even if, for argument's sake, everything you wrote was accurate; there is still no denying that except for Jimmy Carter (and possibly Castro and Oogo Chavez), that no one hated the US more than Hussein and that seven years is an awfully long time for opportunities of mischief.

There is also the fact that Khadaffy Duck (a relative of yours?) had an attitude adjustment after the Iraq invasion, and no one knows what he might have done otherwise.

So, you would still need to look into an alternate universe to have any evidence that the world would be a better place if Hussein was still feeding live human beings to the dogs, or making men watch the rape of their wives and daughters before the beheading.

Re: Stimulie, I

Martin Brock — Tue, 22 Jan 2008 18:33:24 -0000

The premise is false. Congress needn't raise any taxes next year to pay for this year's "stimulus". Next year, when the bill comes due, it borrows again. And if the Fed itself holds the notes, Congress doesn't even pay interest on them, because the Fed's net revenue is income to the Treasury.

Creating money to spend it can be inflationary, of course, but if I think the government's policy is inflationary, I could be more inclined to spend the rebate, because I expect the cash to be worth less in the future.

Do I expect this "stimulus" to have beneficial effects? No. On the other hand, I don't see how it could be worse than "emergency appropriations" for the "war on terror".

Re: Stimulie, I

Kyle L — Tue, 22 Jan 2008 18:20:37 -0000

I have also just began in the Macro part of my AP econ class. Thomas Y knows what he's talking about. Our GDP is 70% consumption, Americans are not going to think 'maybe some time in the future taxes will go up so I should save this money'. They're going to take any extra money available, and spend it on an XBox 360 or a new iPhone or some Hollister clothes for their kids. This will not help the personal welfare of these consumers (except to give them these products that they can't live without), but it will increase consumption and stimulate the economy. No one's going save their extra money; they all want to feed the birds (tuppence a bag)

Re: Stimulie, I

Thomas Y — Tue, 22 Jan 2008 17:42:19 -0000

I've just started studying the Macro section of my AP Economics course. This tax rebate from the Feds was pretty much the center of our discussion today and it makes me wonder now how the increase of money in the market will affect the economy in the short run and long run. In class we read this article about how Americans are better spenders than savers. So wouldn't it be more likely that the tax rebate would boost/stimulate the economy? (Given that "some people lack the willpower to cut back spending")

Re: Stimulie, I

OregonGuy — Tue, 22 Jan 2008 16:47:54 -0000

I don't know what rarified air you guys are breathing. You give sixteen hoondie to anyone around here and you're going to see that money spent on cigarettes and beer first. There are a lot of folks who would love to say "Camel" instead of "Generics". And there will be some great parties. Couple of fifths of Jack and a case of brew, that's a party.

Then? Maybe a payment toward an old bill. It's amazing what a hundred bucks toward a bill can do for one's sense of self esteem. And while we're being sensible, a couple of tee shirts for the kids and maybe a new pair of boots. That and gas money, and about $800.00 is gone. Beer, booze, smokes, some shirts and a pair of boots. Maybe buy the parts to fix the heater in the wife's car.

It's not enough to do anything "real". We are not populated by Jack Whittingtons. Try taking a family of four out for Mexican. With a tip? Sixty bucks. A couple of meals, beer, booze and smokes, boots and t-shirts? We've already spent close to a grand.

That six hundred? It's going to Walmart, baby. Video system? Sure. PS3 is 5-hundy. Done.

What have we done with the dough? The billions? Gone to St. Louis, Missouri. Textile mills in China. Spun through retail land and nothing to show for it. Brilliant economic policy.

Cut taxes on the rich? Or, more correctly, cut corporate taxes? More jobs. More capital expenditures. More income. More income tomorrow. And the day after that.

Give money to the blokes who ain't rich? More income. Once. What would you expect them to do, build an oil refinery? In today's political climate?

Re: Stimulie, I

Hans Luftner — Tue, 22 Jan 2008 16:45:42 -0000

It seems to me that "saving" & "spending" are often subject to interpretation. If I spend my $1600 or whatever on candy, than it would be hard to justify it as saving, unless I was a candy speculator. But if I spent it on gold, foreseeing the coming inflation, than would you call it saving or spending? What about college? Am I spending or investing? A house? A car? A miter saw? New shoes? Cocaine? Almost any spending could be interpreted as saving, given the right rationale, or vice versa. When you factor in inflation, it seems like the mason jar plan would be less like saving than if you traded the money for anything that might hold its value. How would economists or pundits even know which category to put it into, if the people spending/saving it don't always consciously know? Does it even matter? Isn't this really just Keynesian bunk anyway?

Also, Muirgeo's right about the Iraq War. Broken clock, I guess.

Re: Stimulie, I

muirgeo — Tue, 22 Jan 2008 14:05:16 -0000

To know what would have happened if we hadn't removed Hussein would require being able to look into a parallel universe.

Posted by: brotio

Not really Bro since Saddam DID NOT attack us on 9-11, had NOTHING to do with any 9-11, WAS NOT a supporter of Al Queda and there was NO significant Al Queda in Iraq until after we invaded. No parallel universe needed just attention to the details and the facts and most importantly having another source for your information then Fox News.

Re: Stimulie, I

cpurick — Tue, 22 Jan 2008 12:53:47 -0000

"I think we better put that $16,000 aside to pay for those taxes."

Aside where? In Mason jars in the backyard? In a mattress? In fact, the money will go into savings and ultimately gets stuffed into an investment on somebody's behalf.

Even "putting it aside" has a stimulating effect.

Re: Stimulie, I

The Albatross — Tue, 22 Jan 2008 12:32:28 -0000

Bret,

I generally agree with you. The subsidy can sometimes shake its way through the economy with minimal disruption or if it primes the pump properly. The misallocations of resources can always be liquefied later in a time of prosperity. Pete Boettke has characterized economic growth as a race between three horses: (1) Smithin gains (trade), (2) Schumpeteran gains (productivity), and (3) stupidity (government policy), as long as horses 1 and 2 stay ahead, then we might be ok. Unfortunately, number three has a nasty habit of making a charge down the stretch.

Re: Stimulie, I

Jeff — Tue, 22 Jan 2008 12:26:42 -0000

I understand the logic of saving a tax rebate vs. spending it. But wouldn't there be evidence of this phenomenon in the form of higher household savings rates in response to past tax cuts? More basically, I think this logic ignores just how pervasive the "live for now" ethic is in our country. Folks can just as easily conclude that they don't know what's going to happen in the future (and it's likely to be bad) so why not spend now? I have seen this anecdotally among family members and employees of the family business.

Re: Stimulie, I

The Albatross — Tue, 22 Jan 2008 12:07:50 -0000

Saum,

Sorry, I don’t think I can help you, although I am sure there is a “blackboard” economist around here that might have something for you. Off the top of my head I would say that so many factors weigh on economic performance and that any fiscal stimulus is dwarfed by the economy that it would be pretty hard to get a clear picture of its effectiveness, which leaves us with theory (as Russ explores above) and rough ad hoc comparisons (historical examples). Economic growth in the early 90s was largely driven by more people going back to work and larger capacity utilization. Growth in the late 90s and in more recent years has largely been a factor of productivity gains. I guess my point is that since recoveries or growth are sometimes characterized by different, the same, or a mix of factors, then this makes evaluating stimulus in the context of a recovery or growth even harder. However, here are the facts of the 75 tax rebate stimulus, followed by the savings rate (the Hoover link), so we can see if there is a correlation. Interestingly, people seem to save more during recession years, and the dip in savings moderates, flattens, then rises a little through the length of the stimulus (through 76). So while I cannot tell for sure (what effects savings is just as complicated), it might be that “stimulus” will end up in the bank.

http://en.wikipedia.org/wik...

http://www.hoover.org/resea...

Re: Stimulie, I

brotio — Tue, 22 Jan 2008 11:41:22 -0000

Murthaduck ("the children they've killed in cold blood") presumes that with Iraq as a safe haven, that al Qaeda and other Islamo-fascist groups would still not have successfully pulled off another major strike. Or, that such a strike would do no harm to the economy.

To know what would have happened if we hadn't removed Hussein would require being able to look into a parallel universe. I realize that Murthaduck lives in an alternate universe, but I don't think it gives us any insight into what would have happened if Hussein was still literally feeding political rivals to the dogs.

Re: Stimulie, I

Bret — Tue, 22 Jan 2008 11:41:08 -0000

The Albatross wrote: "The subsidy of money [from Fed Action] shows up later to bite the taxpayer, when the inflation it produces reduces the real value of his wages and savings."

Maybe yes, maybe no.

In the case where you have liquidity drying (like now), the Fed action simply replaces some of the liquidity that was lost. The Fed can pull the liquidity later as the other lost liquidity comes on line.

In the case where unemployment is rising (like now), if the Fed action stems the increase in unemployment or even helps reduce unemployment, then the total goods and services are increased and we are all better off (in aggregate) regardless of the resulting inflation (if any, since the larger economy can absorb the extra liquidity).

The economy can adjust pretty quickly to modest changes in the rate of inflation.

Re: Stimulie, I

brotio — Tue, 22 Jan 2008 11:25:26 -0000

If I understood him correctly; Schumer said an income tax rebate is unfair because the poor and middle class don't pay any income tax. He suggested the rebate come from FICA withholding instead.

Conservatives and libertarians ought to run with this idea. Let's lift the burden permanently and let people take their FICA withholdings and invest them as they see fit. A fifteen percent raise might just spur the economy and allow people to adequately plan their own retirements.

Re: Stimulie, I

muirgeo — Tue, 22 Jan 2008 11:23:30 -0000

Creating wealth by cutting taxes = economic growth, investment and innovation.

Posted by: Milton

But I'm not so sure. Clinton raised taxes and much wealth still followed. Bush cut taxes and look at the mess we now have.

My uneducated opinion suggest had we not wasted billions and billions of dollars on this war and had used it to build infrastructure in our own country we would have a very different ecoomy regardless of tax cuts or increases.

Re: Stimulie, I

muirgeo — Tue, 22 Jan 2008 11:15:54 -0000

"....and everything you say is now suspect and treated like workings of a troll. It's your own fault."

Posted by: John V

John,

What are YOU talking about? I basically just asked an honest question and Russell gave me a respected reply that seems to have legitimized the question. As my teen age daughters would reply, "Stop being a hater".

Re: Stimulie, I

Saum — Tue, 22 Jan 2008 11:03:27 -0000

Stimulus spending takes away spending from other areas of govt spending. Agreed. But isn't all govt spending (or individual spending for that matter) a trade-off between various priorities? Threat of a deep recession is a serious one and maybe spending on reducing this threat is worthwhile.

Wouldn't a tax rebate to an individual be better than big public works projects since free marketers believe that individuals are better equipped than the govt bureaucracy to make sound economic decisions?

Re: Stimulie, I

Andrew — Tue, 22 Jan 2008 11:00:48 -0000

It would seem that a rebate at that level is more of a symbolic gesture than an actual measure to increase consumer spending. Whether being seen to be working on the problem will cause market confidence in excess of the actual effect of the action is unlikely in the current climate.

Re: Stimulie, I

Saum — Tue, 22 Jan 2008 10:53:22 -0000

5. Did individual debt burden go down from when the stimulus is launched thru' the recovery period?

4 & 5 are based on comments that say they "expect" individuals to behave in this manner. Seems like there are some measurable variables here to test this theory. Given the complex nature of transactions that drive an economy, I am not confident we can get to a definitive answer, but a more scientific/empirical study would convince me than theory and some expectations/assumptions.