June 24, 2009
Stimulus spending elevator talk
Speaking of wealth, the subject of government stimulus came up in a conversation with my twenty-something sister-in-law:
"Does Keynsian economics say that government spending will stimulate the economy?"
Well, in effect it does because it claims all spending stimulates economic growth and that is music to the ears of a politician who will fall all over himself to outspend his opponents. But how is it supposed to do any good to inject a bunch of worthless paper currency into our economy? They borrow it or print it and then throw it out there but it doesn't actually have any intrinsic value. What has intrinsic value? Resources like agricultural products, mining products, oil and coal and nuclear fuel, or forest products.
"Wow, I've never looked at it that way," says my dear sis-in-law.
And while the government makes a big deal out of "stimulating" the economy with all of this ink-still-drying paper money what have they been doing for the past forty years with all those things that have real intrinsic value? They've been doing everything they can think of to control or outlaw their production and use! In a world like that what use is all of that paper money? Well, I guess paper money does have some intrinsic value. We can put it in our fireplaces and use it to heat our homes.
The iPod design has no intrinsic value? Google's search algorithm, an Intel microprocessor?
Posted by: jk at June 24, 2009 5:03 PMCoke's trademark? Okay, I'll stop. But I cannot join you in saying that a Keynesian multiplier does not ever exist. Government could tax Peter, buy from Paul and increase aggregate activity.
I don't like it any more than you but I do not think you can claim it does not exist.
Posted by: jk at June 24, 2009 5:08 PMYes, of course. "...and the things that are made from them" (the valuable resources) using human labor and ingenuity. [What can I say - it was a short elevator ride.] My intent was not to give a complete list of valuable things, but to point out that paper money is merely a proxy to trade for those things.
But to be fair, the items you mentioned are higher on the "intrinsic value food chain" and therefore don't count for much if those things at the base of the pyramid are in short supply.
Posted by: johngalt at June 24, 2009 5:17 PMSorry, jg, I viciously attacked your elevator speech for two reasons:
-- You attacked mine when I started this category and I am a small-minded, petty man.
-- You play into an extreme philosophical objection of mine. Back-to-the-caves types love to say that we are limited by resources. If you accept -- even between a few floors -- that this is true, you lay a foundation for limitation and ultimately an excuse for wealth redistribution. All of my ideas require a non-zero-sum economy. If there are only three cookies, than Mom better divvy them up.
Intel makes computers out of sand. There are zero limits to wealth creation imposed by natural resources.
You're also straying pretty close to metallism. That will give you a few friends around here but not Old "Fiat-money" jk...
Posted by: jk at June 24, 2009 5:31 PMStanding here with multiple knives in my back makes me wonder why I try to defend the idea of free and fair trade against the inflationary orgasms of the Obama Treasury Department.
If I viciously attacked one or more of your elevator talks then I'll take that hit but it is a great leap from my "natural resources have intrinsic value" to the primativists "nothing is more valuable than the sum of its materials." I certainly didn't make that leap and anyone who does is absolutely a small-minded, petty man. Methinks you are too sensitive to that particular exploitation of my example.
On metallism - This isn't really my idea of capitalist utopia (somewhere on these pages I asked for feedback on a system of multiple private currencies in competion with each other but my search skills are primative and I couldn't find it for reference.) BUT - after I told the aforementioned sis-in-law that the Federal Reserve banks earn a gross profit equal to the rate of inflation multiplied by the entire money supply she asked, "what incentive is there for the FED to keep inflation low?" I'd better prophylactically assert that I'm not an economist but the only thing I could tell her in reply was "so that the whole gig doesn't blow up in their faces." Turbo Tim and the rest of the kids at the levers of power now don't seem to know or care about that incentive.
Posted by: johngalt at June 24, 2009 7:06 PMAnd what happens to the value of that Coca Cola trademark when government imposes an arbitrary tax?
Posted by: johngalt at June 24, 2009 7:09 PMTo jk:
"Government could tax Peter, buy from Paul and increase aggregate activity."
Actually, no. Remember your Bastiat: this comes at an equal cost to the private sector. So at best, there's never an increase in economic activity from government spending. "At best" assumes there's no disincentive to the private sector to maintain the same level of economic output; there generally is.
To both of you guys:
Paper money or even electronic money can work, but the problem with either is that the central monetary authority can always increase it. The problem isn't what the central bank uses; the problem is the central bank itself. Gold and silver have worked well for thousands of years, but even the Romans screwed that up by issuing coinage as gold alloys rather than pure metal.
Deflation is the only real concern of a commodity-backed currency, but it pales in comparison to the economic wrecks that central banks have given us over the last few centuries.
Posted by: Perry Eidelbus at June 25, 2009 11:27 AMBloody Romans!! Where's the Judean People's Front when you need them?
Perry, you attributed a quote of mine to jg that he'd rather not be associated with, so I took the unusual step of correcting it in your comment. I am not prepared to disavow the existence of a Keynesian multiplier. I'll join you and Monsieur Bastiat that it will not add to the aggregate wealth, but it could create activity, "stimulus" to a point.
Deflation "pales in comparison" to inflation? I cannot join you there either. I gladly trade a small (~2%) inflation to avoid deflation any day of the week.
Posted by: jk at June 25, 2009 11:42 AMOh, and on the subject of intrinsic value. Nothing has intrinsic value, not even gold. Something has value only what someone (you or anyone else) places on it. This is a very important point in Austrian economics, known as the diamonds and water paradox, and it explains the absurd notion of the feds buying up "distressed assets" to give them minimum prices.
A grain of sand will have no intrinsic value to desert-dwelling Bedouins, but a bag will have significant value to a New Yorker trying to get some traction on his driveway.
A nugget of gold has great value to us, but to a hunter-gatherer constantly looking for food, its only use might be as a projectile hurled at an animal (giving it the equivalent value of a rock).
Posted by: Perry Eidelbus at June 25, 2009 12:18 PM"I am not prepared to disavow the existence of a Keynesian multiplier. I'll join you and Monsieur Bastiat that it will not add to the aggregate wealth, but it could create activity, "stimulus" to a point."
I'll try not to be too disappointed here, but you should always be ready to disavow anything Keynesian. Have you forgotten where the government's money comes from? By definition, there is always an equal loss to the private sector. If I'm taxed $1, like the shopkeeper in Bastiat's parable, that's $1 less I have to spend on other things. Aggregate economic output does not increase. Wealth, of course, does not increase and can even decrease.
The "multiplier" is a mythical construct of Keynesian in their worship of the state. Private spending has its own multiplier also. If you ever looked at what Keynesians argue, the fallacy begins with the term "marginal propensity to consume." It assumes that when you spend an additional dollar, the recipient of that additional dollar will spend, say, 90 cents and save 10 cents (a 90% "marginal propensity to consume"). The recipient of his additional 90 cents will spend 81 cents and save 9 cents, etc. Supposedly, according to Keynesians, government spending is superior because there's no saving at all.
This is not just a fallacy, but pure idiocy, because it focuses purely on consumption. Savings also result in economic growth. People borrow savings to spend, whether it's to start a new business or buy material goods. Hence what Bastiat said, "To save is to spend." So if I earn an additional $1 and spend only 50 cents, a shopkeeper only benefits from half, but my banker can loan out the other 50 cents to someone who will implicitly spend it. The lesson is Keynesians are so focused on increasing consumption that their efforts are like pushing on a string. You "stimulate" an economy by letting it work on its own, without any "stimulus" from government.
"Deflation "pales in comparison" to inflation? I cannot join you there either. I gladly trade a small (~2%) inflation to avoid deflation any day of the week."
Even 2% inflation is 2% too high. You save money one year, and it's worth less the next year. Meanwhile, your spendthrift neighbors borrow and live high on the hog, and they get to repay debts with deflated currency.
You'll never get that inflation anyway. It's impossible for central banks to calculate that, even with Friedman's idea of inflating the money supply according to population growth. You'll inevitably get varying degrees of inflation and the boom/bust cycles that are inevitable with central banking.
Between freedom over my body, mind and property (the latter includes currency) with a risk of deflation, and being a subject of the state with so-called "monetary stability," I choose the risks and dangers of freedom.
Posted by: Perry Eidelbus at June 25, 2009 12:38 PMYes, and the more pedestrian way I would state the same conclusion as Perry is this:
"There are zero limits to wealth creation imposed by natural resources." Instead, wealth creation is limited by government.
Posted by: johngalt at June 25, 2009 1:12 PM | What do you think? [11]