*Washington Logic*
Posted By Sheldon Richman On January 30, 2009 (8:46 am) In
Featured<http://fee.org/category/featured/>,
The Freeman <http://fee.org/category/the-freeman-magazine/>,
The Goal Is Freedom <http://fee.org/category/articles/tgif/>
*Sheldon Richman <srichman@fee.org?subject=Washington+Logic> is the editor
of *The Freeman* and "In brief,"* and author of
"Fascism"<http://www.econlib.org/library/Enc/Fascism.html>in
*The Concise Encyclopedia of Economics. *TGIF *appears Fridays. *
Let me see if I have this straight. The U.S. government is going to borrow
$819-$??? *billion*, largely from the Chinese (if they'll lend it,
whichthey may not<http://www.nytimes.com/2009/01/08/business/worldbusiness/08yuan.html?scp=2&sq=china&st=cse>)
and put that money into people's pockets in a hundred different ways, from
paying workers for filling potholes, to extending unemployment benefits, to
expanding Medicare, to weatherizing buildings, to enlarging the National
Endowment for the Arts, and on and on and on. This is going to make us all
richer. What would we do without those folks in Washington, D.C.?
I like to know the theory behind things. The theory behind this alleged
stimulus idea is the Keynesian principle that economic depressions result
from inadequate aggregate demand. We're not buying enough stuff–either
because we don't have the money or we're anxious about the future–and this
reduces employment and incomes, which in turn further reduces demand,
employment, and incomes. The economy spirals down.
If (the theory continues) the government borrows or creates money and gives
it to people who are likely to spend it, such as the poor and unemployed
(not those more-affluent folks who are likely to save it), the economy can
recover, that is, unemployment will decline and idle resources will be
pressed into service. The new recipients of the largess will drive the
economic recovery by buying things, increasing the incomes of the sellers,
who will then buy things, increasing the incomes of those sellers, etc. All
this will stimulate investment. Now the spiral is upward. For every dollar
the government spends this way, so we're told, GDP will go up by more than a
dollar. But when money is simply left in private hands, say, through tax
cuts, the effect is … *bupkis <http://en.wiktionary.org/wiki/bupkis>*. This
apparently is because the money will be saved, and in this story saving is
the devil's handiwork. It is nonspending, nonconsumption, which means it's
income deprivation. No one will invest the savings (so it is argued) if
consumption is flagging. Keynes famously wrote that just because someone
saves by abstaining from eating dinner today doesn't mean he will be eating
dinner tomorrow. So why would anyone invest? (If you reply that people
typically save for a reason, you have too much common sense to play this
game. Go back and take Economics 101.)
*Don't Just Stand There–Spend!*
There's been a good deal of wrangling over how the government should spend
the "stimulus" money. But to a good Keynesian this must be frustrating
because it really doesn't matter how the money is spent, as long as the
government spends it–and quickly. For a long while I thought the Keynesian
theory was surely more nuanced than that. But I was wrong. I recently
listened to a podcast conversation between Russell Roberts and Keynesian
Professor Steve Fazzari of Washington University during which Fazzari said
that paying people to dig and fill holes would be just as effective as any
other spending program. The point, he emphasized, is to increase aggregate
demand. (Don't take my word for it. Listen for
yourself.<http://www.econtalk.org/archives/2009/01/fazzari_on_keyn.html>
)
Aggregate demand is obviously down these days. We aren't buying as much as
we used to. This didn't happen out of the blue. When housing values
plummeted, many people cut back their spending because, for example, they
had no housing equity to borrow against or their mortgage payment ballooned
and they couldn't refinance. As the adverse effect on institutions holding
mortgage-backed securities rippled out, people became anxious about the
future and reined in spending, which sent the ripples out further, resulting
in more reining-in, and so on.
The question is what do we do about it. The dominant view, embodied in the
"stimulus" package, is that it doesn't matter what caused demand to
collapse–we must do everything we can to build it back up, along with
housing values and other macroeconomic variables. The more intelligent
approach is to understand *why *things are the way they are so that causes
and not just symptoms can be addressed.
*Fixation of the Macro*
As economist Mario
Rizzo<http://www.ssrc.org/calhoun/2008/09/30/bailouts/#comment-66>points
out, fixation on the macro takes our eyes off the ball, namely, the
micro policies and actions that brought us to this state of affairs. In
other words, Rizzo writes, "Too many resources went into the housing
market," thanks to government programs. The solution, then, is not demand
management through government spending or contrivances to raise home prices
back to their old unsustainable, government-induced levels. Rather, "Markets
should be allowed to equilibrate." That is, housing prices must find the
level at which they reflect economic reality, which in turn will reveal the
value of mortgage-backed securities and the condition of the financial
institutions holding or insuring them. Only when markets have sorted this
out can the capital structure and prices be reconfigured in ways appropriate
to real conditions and consumer preferences. That is the recovery phase.
But what about the meantime? For the government the injunction should be: do
no harm. Unfortunately, harm is what government does best. As Roger Garrison
says, it's a net producer of macro instability. One way it does harm is by
creating an environment of uncertainty. Will it nationalize the banks? Will
it buy toxic assets? Will it bail out company X? Okay, it didn't do it this
week, but how about next week? Will taxes be raised or lowered? How will the
debt be paid? Political uncertainty is not good for long-term planning.
Those who insist that the private economy cannot regenerate itself ought to
pay more attention to the manifold ways they help make that a
self-fulfilling prophecy. Stop giving entrepreneurs and investors reasons to
shrug.
Government borrowing does not inject money into the economy. It was already
there. But it can and does reduce the amount of capital available for
private investment. To the extent the government borrows, the economy serves
politicians not consumers. This is the broken-window fallacy exposed by
Bastiat. Moreover, since the Federal Reserve will monetize the debt by
continuing to expand the money supply, it will set in motion all the evils
that accompany inflation: investment and price distortions, wealth
transfers, and calculational chaos. Any short-term illusion of recovery will
be paid for with a new crisis up the road.
That said, it is unrealistic to expect politicians, who live short-term, to
pay any heed to sound economic theory. The public has been taught for years
that the government is the steward of the economy. If things slow
down, our "leaders"* *are expected to do something. A politician with both
the understanding and courage to resist that expectation is as rare as a
dodo bird.
If we're going to change politicians' thinking about the economy, we'll
first have to change the public's thinking. We have our work cut out for us.
But we have to start somewhere.
Article taken from Foundation for Economic Education - http://fee.org
URL to article:
http://fee.org/featured/the-goal-is-freedom-washington-logic/
*Sheldon Richman <srichman@fee.org?subject=Washington+Logic> is the editor
of *The Freeman* and "In brief,"* and author of
"Fascism"<http://www.econlib.org/library/Enc/Fascism.html>in
*The Concise Encyclopedia of Economics. *TGIF *appears Fridays. *
Let me see if I have this straight. The U.S. government is going to borrow
$819-$??? *billion*, largely from the Chinese (if they'll lend it,
whichthey may not<http://www.nytimes.com/2009/01/08/business/worldbusiness/08yuan.html?scp=2&sq=china&st=cse>)
and put that money into people's pockets in a hundred different ways, from
paying workers for filling potholes, to extending unemployment benefits, to
expanding Medicare, to weatherizing buildings, to enlarging the National
Endowment for the Arts, and on and on and on. This is going to make us all
richer. What would we do without those folks in Washington, D.C.?
I like to know the theory behind things. The theory behind this alleged
stimulus idea is the Keynesian principle that economic depressions result
from inadequate aggregate demand. We're not buying enough stuff–either
because we don't have the money or we're anxious about the future–and this
reduces employment and incomes, which in turn further reduces demand,
employment, and incomes. The economy spirals down.
If (the theory continues) the government borrows or creates money and gives
it to people who are likely to spend it, such as the poor and unemployed
(not those more-affluent folks who are likely to save it), the economy can
recover, that is, unemployment will decline and idle resources will be
pressed into service. The new recipients of the largess will drive the
economic recovery by buying things, increasing the incomes of the sellers,
who will then buy things, increasing the incomes of those sellers, etc. All
this will stimulate investment. Now the spiral is upward. For every dollar
the government spends this way, so we're told, GDP will go up by more than a
dollar. But when money is simply left in private hands, say, through tax
cuts, the effect is … *bupkis <http://en.wiktionary.org/wiki/bupkis>*. This
apparently is because the money will be saved, and in this story saving is
the devil's handiwork. It is nonspending, nonconsumption, which means it's
income deprivation. No one will invest the savings (so it is argued) if
consumption is flagging. Keynes famously wrote that just because someone
saves by abstaining from eating dinner today doesn't mean he will be eating
dinner tomorrow. So why would anyone invest? (If you reply that people
typically save for a reason, you have too much common sense to play this
game. Go back and take Economics 101.)
*Don't Just Stand There–Spend!*
There's been a good deal of wrangling over how the government should spend
the "stimulus" money. But to a good Keynesian this must be frustrating
because it really doesn't matter how the money is spent, as long as the
government spends it–and quickly. For a long while I thought the Keynesian
theory was surely more nuanced than that. But I was wrong. I recently
listened to a podcast conversation between Russell Roberts and Keynesian
Professor Steve Fazzari of Washington University during which Fazzari said
that paying people to dig and fill holes would be just as effective as any
other spending program. The point, he emphasized, is to increase aggregate
demand. (Don't take my word for it. Listen for
yourself.<http://www.econtalk.org/archives/2009/01/fazzari_on_keyn.html>
)
Aggregate demand is obviously down these days. We aren't buying as much as
we used to. This didn't happen out of the blue. When housing values
plummeted, many people cut back their spending because, for example, they
had no housing equity to borrow against or their mortgage payment ballooned
and they couldn't refinance. As the adverse effect on institutions holding
mortgage-backed securities rippled out, people became anxious about the
future and reined in spending, which sent the ripples out further, resulting
in more reining-in, and so on.
The question is what do we do about it. The dominant view, embodied in the
"stimulus" package, is that it doesn't matter what caused demand to
collapse–we must do everything we can to build it back up, along with
housing values and other macroeconomic variables. The more intelligent
approach is to understand *why *things are the way they are so that causes
and not just symptoms can be addressed.
*Fixation of the Macro*
As economist Mario
Rizzo<http://www.ssrc.org/calhoun/2008/09/30/bailouts/#comment-66>points
out, fixation on the macro takes our eyes off the ball, namely, the
micro policies and actions that brought us to this state of affairs. In
other words, Rizzo writes, "Too many resources went into the housing
market," thanks to government programs. The solution, then, is not demand
management through government spending or contrivances to raise home prices
back to their old unsustainable, government-induced levels. Rather, "Markets
should be allowed to equilibrate." That is, housing prices must find the
level at which they reflect economic reality, which in turn will reveal the
value of mortgage-backed securities and the condition of the financial
institutions holding or insuring them. Only when markets have sorted this
out can the capital structure and prices be reconfigured in ways appropriate
to real conditions and consumer preferences. That is the recovery phase.
But what about the meantime? For the government the injunction should be: do
no harm. Unfortunately, harm is what government does best. As Roger Garrison
says, it's a net producer of macro instability. One way it does harm is by
creating an environment of uncertainty. Will it nationalize the banks? Will
it buy toxic assets? Will it bail out company X? Okay, it didn't do it this
week, but how about next week? Will taxes be raised or lowered? How will the
debt be paid? Political uncertainty is not good for long-term planning.
Those who insist that the private economy cannot regenerate itself ought to
pay more attention to the manifold ways they help make that a
self-fulfilling prophecy. Stop giving entrepreneurs and investors reasons to
shrug.
Government borrowing does not inject money into the economy. It was already
there. But it can and does reduce the amount of capital available for
private investment. To the extent the government borrows, the economy serves
politicians not consumers. This is the broken-window fallacy exposed by
Bastiat. Moreover, since the Federal Reserve will monetize the debt by
continuing to expand the money supply, it will set in motion all the evils
that accompany inflation: investment and price distortions, wealth
transfers, and calculational chaos. Any short-term illusion of recovery will
be paid for with a new crisis up the road.
That said, it is unrealistic to expect politicians, who live short-term, to
pay any heed to sound economic theory. The public has been taught for years
that the government is the steward of the economy. If things slow
down, our "leaders"* *are expected to do something. A politician with both
the understanding and courage to resist that expectation is as rare as a
dodo bird.
If we're going to change politicians' thinking about the economy, we'll
first have to change the public's thinking. We have our work cut out for us.
But we have to start somewhere.
Article taken from Foundation for Economic Education - http://fee.org
URL to article:
http://fee.org/featured/the-goal-is-freedom-washington-logic/
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