Another Stupid Stimulus Plan - Jobs, Keynes, and Chess

[Meadmaker]

I’ve been thinking about stimulus packages lately, and in general about the causes of recessions and the appropriate government response when they happen. With the election of Barack Obama and the emergence of a strong Democratic legislative majority, the ideas associated with John Maynard Keynes took center stage. His idea was during times of high unemployment, the government ought to hire a bunch of workers. Not only would those workers get jobs, but they would send money, creating demand and leading to more job growth through a “multiplier” effect. In some variations on this theme, it only works if using borrowed money.

I’m deeply suspicious of the idea. It strikes me as very questionable in a couple of ways. First, while I am by no means either a right winger or libertarian, I do think that the private sector does consumer economics much better than the government. If there’s a buck to be made, someone will make it, and in the course of doing so, will end up hiring people to help. If at all possible, the private sector ought to do the hiring. Second, the deficit spending aspect is troubling to me. Taxes are a transfer payment, and so should have little if any economic effects by themselves. Therefore, I can’t see any harm in actually paying for a stimulus plan if you choose to have one. Even if you can’t pay the full cost in the year of the stimulus, I think there should be an appropriate level of taxation that demonstrates how, someday, all this spending will be paid for.

While contemplating these things, I was discussing Chess with someone who lamented the decline in tournament attendance. The juxtaposition of those thoughts led me to the following thought experiment.

I want to propose the Stupid Stimulus Plan II – the Keynesian Edition. (I started a thread last year with a different stupid plan.) My proposal is to pay people to play Chess. I don’t mean just a few people. I mean lots of people. We’ll also provide Chess sets for the players, produced by domestic manufacturers, and maybe build a few buildings. Professional Chess players would be required to play Chess 40 hours per week to earn their paychecks. This inclues time for tournaments, practice, study, and lessons. Since players at all levels are needed, the Chess jobs won’t be limited to good Chess players, just to people willing to put in their fourty hours of Chess play each week.

Pretty stupid, right?

Of course it is. However, in terms of its ability to stimulate the economy, it ought to be just as good as other stimulus plans. It creates jobs. The Keynesian multiplier ought to be no less for the Stupid Stimulus Plan, hereafter referred to as StuStim2, than for other stimulus plans.

Or did I miss something?

I don’t want to drag on too much with analysis. However, I’ll make a few points. First, I, personally, think that not only would the plan fail and not stimulate the economy, but it would be worse than doing nothing. On the other hand, if you consider the effect on GDP, StuStim2 would cause it to rise. Then, when it was discontinued, GDP would fall and unemployment would rise. Proponents might say that it was working, but the plug was pulled prematurely. Third, there are three ways to pay for this. We could collect taxes, we could borrow the money throught sale of bonds to private parties, or we could “print money”, by selling bonds to the Fed. Some proponents of Keynesian stimulus would say that only borrowing money would work. I would claim that any of the three methods would have a somewhat destimulating effect, but of the three, taxation would be the least destimulating, and therefore preferable to the two possible forms of borrowing.

That’s enpugh for an OP. I would like to invite critique of it. My main goal is to try and understand the Keynesian approach. I have presented a plan that is clearly stupid, and yet it would appear to fit in with the Keynesian scheme. Clearly, either there is something wrong with Keynes, or there is something lacking in my understanding of it. Can anyone provide some enlightened thinking to illustrate where the flaws in reasoning, mine or Keynes, can be found?

 

[mhaze]

http://www.youtube.com/watch?v=d0nERTFo-Sk

 

[Francesca R]

Taxes are a transfer payment, and so should have little if any economic effects by themselves. Therefore, I can’t see any harm in actually paying for a stimulus plan if you choose to have one.

Actually I don't think you'll find many economists (Keynsian or otherwise) who claim that taxes have little if any economic effects by themselves. I think taxes are universally believed to be negative for economic output.

Since you can't have a welfare state without taxes (disregarding voluntary charity), those who support some income redistribution acknowledge the necessity of taxes and benefits, but I believe you will find no economist claiming that total income is anything but lower.

The bit about "if you choose to have [a stimulus]", is that many economists who believe demand-management "works" think that additional government demand now (followed by contraction later, when everything's fine again) is superior to nothing, because it--at least to some extent--stabilises the "cycle" and therefore can head off self-feeding paradoxes of thrift and pessimism. Many others think tax cuts work better than extra spending, yet they have been remarkably less popular (with governments) this time around, partly because taxes were already cut, and because to cut them more, spending needs to be cut too, much of which works in the opposite direction to redistribuition. There is even an argument that "There's no point in cutting taxes because people will save the cut and not spend it", which is IMO quite irrelevant.

Even if you can’t pay the full cost in the year of the stimulus, I think there should be an appropriate level of taxation that demonstrates how, someday, all this spending will be paid for.

Lenders to the government (bond market participants) think that too, and if they become sceptical about it they will do more than post on message boards. Currently, several governments are having greater problems convincing everyone that they can pay their obligations than the US is. Particularly Greece, Portugal, Ireland.

I want to propose the Stupid Stimulus Plan II [ . . . ]

Unless this plan unleashes hitherto pent-up demand to watch chess games, then its downstream effects are very small, and its internal rate of return (including the loss inflicted by borrowing/taxing the money to pay for it) is likely quite negative. It could still provide a positive quarter of GDP growth in place of a negative one, and it can still arrest a cycle of falling confidence etc, but its total impact over a cycle would be negative.

Conversely, spending to build infrastructure (which would have a highly positive IRR if it increased productivity) can quite easily be net positive IMO for economic output even over a "cycle". But it pays off slowly, and has little near term "bounce" effect, and hence it is usually pretty low down the list of government priorities in a recession. (Very little of Obama-Pelosi stimulus went on long term investment of a productivity-raising type; none of cash for clunkers or mortgage assistance was)

 

[daenku32]

I think there are a few points you have missed:

1) Obama, and the Blue Dog Dems, have come a bit short on Keynesian. Just ask Krugman.
2) Us consumers are not consuming. And without that consumption there is no demand for goods, or the labor that makes them. Without the need for labor there aren't jobs. Until the private sector, the supply-siders, can figure out what they need to make in order to get people to want to start consuming again, a whole lot of workers will remain unemployed. And because savings of individuals are at all time lows, it is very unlikely that they are willing to buy things they don't absolutely need because that means they have to borrow to buy them. We are looking at a long term consumer malaise.
3) While I think taxes should be increased eventually, the deficit spending done today is done by digging into the vast pool of money that is sitting around in the private market and not being used for anything. Since our taxation is based on income rather than assets, paying for the stimulus by taxes rather than deficits would have a vastly different impact on the economy.

 

[Meadmaker]

Actually I don't think you'll find many economists (Keynsian or otherwise) who claim that taxes have little if any economic effects by themselves. I think taxes are universally believed to be negative for economic output.

Why?

In the models I've seen, the assertion is that people won't work as hard if they can't keep as much of their money. At the extremes (like communism) that makes sense, but I have a hard time believing that the guy who wants the corner office will decide it isn't worth the extra work if his marginal tax rate is 45% instead of 35%. Is there any evidence to support this assertion?

I've also seen an argument that higher taxes distort the placement of money in order to avoid the taxes. In other words, high federal taxes would alter the demand for municipal bonds, or would create a greater underground economy as people seek to avoid taxation. I can see that having a small, very small, effect.

In general, though, tax moves money from a person to a government. Instead of a person spending money, the government spends the money. If you want to say that government spending is less stimulative than private spending, you could probably talk me into it, but does that fit with the Keynesian theory?

Unless this plan unleashes hitherto pent-up demand to watch chess games, then its downstream effects are very small, and its internal rate of return (including the loss inflicted by borrowing/taxing the money to pay for it) is likely quite negative. It could still provide a positive quarter of GDP growth in place of a negative one, and it can still arrest a cycle of falling confidence etc, but its total impact over a cycle would be negative.

I tend to agree. In fact, I think it would cut real economic output even while GDP increases. That, in and of itself, is something a lot of people seem to think is impossible, but it seems to me they are wrong. At any rate, in Keynesian terms, it ought to succeed. Who cares if they are building roads, teaching children, or playing Chess? They are employed and getting a paycheck. The magic "multiplier" ought to kick in, shouldn't it?

But it pays off slowly, and has little near term "bounce" effect

What kind of spending gives a "bounce" effect? Why does some spending give a bounce, while other spending goes splat?

 

[Francesca R]

Why?

In the models I've seen, the assertion is that people won't work as hard if they can't keep as much of their money. At the extremes (like communism) that makes sense, but I have a hard time believing that the guy who wants the corner office will decide it isn't worth the extra work if his marginal tax rate is 45% instead of 35%. Is there any evidence to support this assertion?

Take your pick. The only thing that is debated is how to minimise the efficiency (output) loss from tax; there is no debate that I am aware of that it occurs.

I've also seen an argument that higher taxes distort the placement of money in order to avoid the taxes. In other words, high federal taxes would alter the demand for municipal bonds, or would create a greater underground economy as people seek to avoid taxation. I can see that having a small, very small, effect.

Do you have any evidence that it's small or did you just assume? Again look at the literature. The first paper there (from the World Bank) says this:

Estimates of the size of the informal economy in 110 developing, transition and OECD countries are presented. The average size of the informal economy, as a percent of official GNI in the year 2000, in developing countries is 41%, in transition countries 38% and in OECD countries 18%. A large burden of taxation and social security contributions combined with government regula tions are the main determinants of the size of the informal economy.

​

In general, though, tax moves money from a person to a government. Instead of a person spending money, the government spends the money. If you want to say that government spending is less stimulative than private spending, you could probably talk me into it, but does that fit with the Keynesian theory?

That is not the argument that taxes impose losses on economic output. They impose the loss before the tax is collected, meaning that the tax collected must be less than the fall in output from before it was charged.

What kind of spending gives a "bounce" effect? Why does some spending give a bounce, while other spending goes splat?

If it results in increased consumption it has a larger but shorter lived impact.

 

[Meadmaker]

Take your pick. The only thing that is debated is how to minimise the efficiency (output) loss from tax; there is no debate that I am aware of that it occurs.

A google page has both too much and too little ioformation to address. To read all the papers would be too much. To read the abstracts, too little. I compromised and read the first page (all that was offered) of the first article. Sure enough, there was a mathematical model that was based on the idea that someone had a desired value of leisure L, balanced against a desire for goods X and Y, and that as tax rates increased, he would work less hard because his increasing abilty to get L was balanced against his diminished ability to get X and Y and...page 2 must have had the actual equations, but you get the idea.

And if real people really behaved that way, the paper would have some legitimacy, but they don't, and so although there is no debate about it, there really ought to be because it's not the way real people really behave, and so the models fail.

Do you have any evidence that it's small or did you just assume? Again look at the literature. The first paper there (from the World Bank) says this:

​

This seems more plausible. I know real people who really behave that way. It makes sense. I am still suspicious that it actually has a huge effect on economic output, although it might have a big impact on tax revenue, as more people lie to the IRS. (or the local equivalent).

If it results in increased consumption it has a larger but shorter lived impact.

But why would Chess spending not result in increased consumption, but spending on teachers or cops or road workers would result in increased consumption? It's hard to believe that the rate of consumption depends on the type of job created. If people have jobs, they will spend more. What does it matter what sort of jobs they have, in the short term?

To phrase the question slightly better, what would a Keynesian say to that? I think there's a legitimate answer to that question, but it flies in the face of Keynesian economics, as I understand it.

 

[KoihimeNakamura]

I think the number and type mean more.

 

[Meadmaker]

http://www.youtube.com/watch?v=d0nERTFo-Sk

That was incredibly good.

 

[Francesca R]

And if real people really behaved that way, the paper would have some legitimacy, but they don't

The evidence is that they do. In the aggregate they pretty much have to. You don't want to learn about it though, so you didn't look at the evidence you asked about, which is a fairly typical response from you.

So you can imagine that some guy might respond to a rise in income taxes by asking to put in more overtime. OK, sounds rational enough. But his employer then needs to pay him more, and has to be willing to rent more of his labour, for which she presumably obtains more product, that she then needs to sell to customers who all . . . have less disposable income because all their taxes went up too. So most of the time she has to say "No" to the overtime request, or even cut back his hours against his wishes, or lay somebody less productive off.

It doesn't add up at the level of the whole economy that taxes have anything but a contractionary effect on output.

although there is no debate about it, there really ought to be because it's not the way real people really behave, and so the models fail.

Produce evidence that they've failed in general--which in this case would be evidence that raising tax has no effect on economic output.

But why would Chess spending not result in increased consumption, but spending on teachers or cops or road workers would result in increased consumption?

They would all have quite similar first-round effects. But teachers might produce more educated folks (human capital), cops might reduce the crime rate and increase society's productivity as a result, road workers might build infrastructure that lowers costs to businesses. Or they might not. But those things--if they happen--have a longer lasting output-generating payoff. Its hard to believe that a chess game played last quarter has any relevance to this quarter's product.

 

[Meadmaker]

The Chess plan would create jobs, and would contribute to GDP, because all those Chess salaries would be added to the GDP. (And of course, that famous multiplier.) Despite that, it would suck away real wealth from the nation’s economy. The implication is that GDP might not always be a true indicator of economic health.

Keynesians look at Japan’s Lost Decade and see a rising GDP and lower unemployment when the government applied stimulus, and then a fall when stimulus was removed. The Keynesians lament the removal of the stimulus, and feel that if they had just kept going, it would have worked.

An alternative explanation is that the stimulus plans were no better than the Chess plan. They boosted GDP, but helped destroy real wealth. When removed, the plans left the country poorer than if they had not been implemented.

 

[IchabodPlain]

I’ve been thinking about stimulus packages lately, and in general about the causes of recessions and the appropriate government response when they happen. With the election of Barack Obama and the emergence of a strong Democratic legislative majority, the ideas associated with John Maynard Keynes took center stage. His idea was during times of high unemployment, the government ought to hire a bunch of workers. Not only would those workers get jobs, but they would send money, creating demand and leading to more job growth through a “multiplier” effect. In some variations on this theme, it only works if using borrowed money.

I’m deeply suspicious of the idea. It strikes me as very questionable in a couple of ways. First, while I am by no means either a right winger or libertarian, I do think that the private sector does consumer economics much better than the government. If there’s a buck to be made, someone will make it, and in the course of doing so, will end up hiring people to help. If at all possible, the private sector ought to do the hiring. Second, the deficit spending aspect is troubling to me. Taxes are a transfer payment, and so should have little if any economic effects by themselves. Therefore, I can’t see any harm in actually paying for a stimulus plan if you choose to have one. Even if you can’t pay the full cost in the year of the stimulus, I think there should be an appropriate level of taxation that demonstrates how, someday, all this spending will be paid for.

While contemplating these things, I was discussing Chess with someone who lamented the decline in tournament attendance. The juxtaposition of those thoughts led me to the following thought experiment.

I want to propose the Stupid Stimulus Plan II – the Keynesian Edition. (I started a thread last year with a different stupid plan.) My proposal is to pay people to play Chess. I don’t mean just a few people. I mean lots of people. We’ll also provide Chess sets for the players, produced by domestic manufacturers, and maybe build a few buildings. Professional Chess players would be required to play Chess 40 hours per week to earn their paychecks. This inclues time for tournaments, practice, study, and lessons. Since players at all levels are needed, the Chess jobs won’t be limited to good Chess players, just to people willing to put in their fourty hours of Chess play each week.

Pretty stupid, right?

Of course it is. However, in terms of its ability to stimulate the economy, it ought to be just as good as other stimulus plans. It creates jobs. The Keynesian multiplier ought to be no less for the Stupid Stimulus Plan, hereafter referred to as StuStim2, than for other stimulus plans.

Or did I miss something?

I don’t want to drag on too much with analysis. However, I’ll make a few points. First, I, personally, think that not only would the plan fail and not stimulate the economy, but it would be worse than doing nothing. On the other hand, if you consider the effect on GDP, StuStim2 would cause it to rise. Then, when it was discontinued, GDP would fall and unemployment would rise. Proponents might say that it was working, but the plug was pulled prematurely. Third, there are three ways to pay for this. We could collect taxes, we could borrow the money throught sale of bonds to private parties, or we could “print money”, by selling bonds to the Fed. Some proponents of Keynesian stimulus would say that only borrowing money would work. I would claim that any of the three methods would have a somewhat destimulating effect, but of the three, taxation would be the least destimulating, and therefore preferable to the two possible forms of borrowing.

That’s enpugh for an OP. I would like to invite critique of it. My main goal is to try and understand the Keynesian approach. I have presented a plan that is clearly stupid, and yet it would appear to fit in with the Keynesian scheme. Clearly, either there is something wrong with Keynes, or there is something lacking in my understanding of it. Can anyone provide some enlightened thinking to illustrate where the flaws in reasoning, mine or Keynes, can be found?

I don't quite understand why you wouldn't read Keynes to begin with. I'm sure it's available at your local library. Your proposals main flaw is that it does little to nothing to stimulate future investment(s). Unless you believe there is a pent up demand for chess, your proposal will fail to generate investment and productivity related to other goods.

This could be contrasted earlier stimulus plans of infrastructure spending, which stimulates the tansportation industry, not only causing new production in commercial trucks, freight lines, but reducing transportation costs to all goods that must be trasferred (all of them) and make certain markets easier to access (bridges to somewhere). I would think the modern-day equivalent is in the field of energy.

In the very-near term, your proposals has similar features - employing people, and generating growth in a given industry, increasing circulation (money multiplier). It's after-effects would probably drop off (unless of course, chess then becomes widely popular), because it did not occur in an industry where the initial expense is likely to stimulate future investment and consumption.

 

[Tsukasa Buddha]

There are actually two types of people that are called Keynesian. The New Keynesians, and the Post-Keynesians. And the interesting thing is that what most economists know about Keynes is actually from a guy that was countering him (See the IS-LM graph).

Oh, and read him. He wrote great stuff on risk that has been ignored.

 

[Meadmaker]

I don't quite understand why you wouldn't read Keynes to begin with.

Actually read the book? That's far too much like work. After seeing that youtube video, what more do I need to know?

Seriously, though, that's a good suggestion. I really am curious about it, and I do intend to read him. Someday.

Your proposals main flaw is that it does little to nothing to stimulate future investment(s).

I think it's much worse than that. I think it would drag down the present, in addition to dragging down the future. However, our measure of success might suggest, erroneously, that it was doing some good. Certainly, it would help the people who get the wages, and that is a good thing, but the overall effect would be, in my opinion, a burden on society with no real upside.

Don't get me wrong. I'm not against government stimulus programs, but in the short run, I question their ability to stimulate. I think that times of high unemployment are a good time for government to make a long term investment in things with long payoffs, but I don't think they help turn around the economy. I think they help a fair number of individuals weather the storm, and provide some long term good if and only if they are done in a way that produces wealth, at least in the long term. While they might mitigate some of the human suffering associated with recessions, I doubt that they cause those recessions to end any earlier.

And, as always, I seriously question the premise that it will only stimulate if you use borrowed money.

 

[IchabodPlain]

Actually read the book? That's far too much like work. After seeing that youtube video, what more do I need to know?

Seriously, though, that's a good suggestion. I really am curious about it, and I do intend to read him. Someday.

Being both a Teddy Roosevelt and Creedence Clearwater Revival fan, I'd say someday never comes.

I think it's much worse than that. I think it would drag down the present, in addition to dragging down the future. However, our measure of success might suggest, erroneously, that it was doing some good. Certainly, it would help the people who get the wages, and that is a good thing, but the overall effect would be, in my opinion, a burden on society with no real upside.

Immediately, it would have some positive effects. There would be fewer unemployed people. There would also be new production orders in the private sector (which, in a backsliding economy, would retain jobs). The money paid in wages would cycle through the economy.

When you say "overall effect" I really don't know what you mean. What time frame are you looking at to measure overall effect? Our "measure of success" would be accurate -- in the given time that your stimulus plan is in effect.

ETA: They would also be accurate afterwards as well. It's just that your plan is deficient.

Don't get me wrong. I'm not against government stimulus programs, but in the short run, I question their ability to stimulate.

There is no reason to think that. The short term (defined, in this case, as the length of time the stimulus money is being spent) is when they have the most stimulative effect on the economy. It's when the money stops coming that your plan has a problem. Like I said before, your plan is deficient in that it is not likely to produce future investment and consumption. It also has zero sustainable jobs after the program finishes. Contrast that with an infrastructure program, in which you still need residual workers to maintain roads afterwards, and is likely to stimulate the economy even after the program is over. At present, I see an investment in the energy sector as a present day equivalent.

I think that times of high unemployment are a good time for government to make a long term investment in things with long payoffs, but I don't think they help turn around the economy.

Why wouldn't they?

I think they help a fair number of individuals weather the storm, and provide some long term good if and only if they are done in a way that produces wealth, at least in the long term. While they might mitigate some of the human suffering associated with recessions

You're arguing for stimulus plans here. You're saying yes, it does reduce suffering, it does help people, yet:

I doubt that they cause those recessions to end any earlier

Why?

Staring that assertion in the face are the facts that they:

1) Reduce unemployment
2) Increase production
3) Increase demand for other goods (money multiplier)
and if done right..
4) facilitate future investment and consumption
5) Provide sustainable jobs even after the initial expense

And, as always, I seriously question the premise that it will only stimulate if you use borrowed money.

What's the alternative?

You want to increase taxes to raise the money? You see raising taxes (reducing purchasing power) in a recession/depression (when consumption is falling) as viable?

 

[Francesca R]

Don't get me wrong. I'm not against government stimulus programs, but in the short run, I question their ability to stimulate.

Q4 US GDP + 5.7% annualised

 

[Meadmaker]

Immediately, it would have some positive effects. There would be fewer unemployed people. There would also be new production orders in the private sector (which, in a backsliding economy, would retain jobs). The money paid in wages would cycle through the economy.

The Cash for Chess Stimulus Plan was my thought experiment to try and figure out whether this effect is real. It was a case where the government employed people, but at something obviously useless. If you took it to just a little bit more extreme, instead of playing Chess, just give them the money. In other words, institute a high paying welfare system for a portion of the population.

Economically, Cash for Chess is the same thing as a dole. However, in one case, GDP rises. In the other case, GDP doesn't rise. The fact that the exact same thing happens, but is measured differently, ought to suggest there's something wrong with the measurement system, and possibly the underlying assumption.

The underlying assumption is that the money paid in wages would circulate through the economy. Certainly, it would, but any better, or worse, than with some other plan? Consider four possible plans:

1. No stimulus.
2. An intelligent stimulus. (Like 2009's, where real jobs are created by the government)
3. A stupid stimulus. (Like Cash for Chess)
4. High paying welfare.

In terms of circulating money, 2,3, and 4 should all have exactly the same effects. The difference between 1 and any of those would be determined by whether the people who have money are somehow not circulating it, but the people who get money would circulate it. That's a bit of a difficult case to demonstrate, it seems to me. Are there really a lot of people sitting on uncirculating money? Sure, we are all in debt and not spending as much as we would wish, but that's true of the unemployed people too. If you give those folks wages, those dirty scoundrels are likely to pay off their credit cards or prevent foreclosures rather than engage in the consumer culture like we need them to! Better to just give people with no debt the money. Those are the only people who can go to Starbucks and stimulate the economy!

Meanwhile, even in a recession, employers are hiring people. They aren't hiring all that many people, but they still have to hire people. 2, 3, and 4 all make it more difficult to hire people. Because that's true, all would have at least some short term destimulating effect.

When you say "overall effect" I really don't know what you mean. What time frame are you looking at to measure overall effect?

Short term.

Why wouldn't they? (stimulate the economy)

If they (stimulus plans) really did that, then increased welfare would also do that. Instead, I think in both cases what they do is compete with private sector employers.

You're arguing for stimulus plans here. You're saying yes, it does reduce suffering, it does help people, yet:

Long term investment in infrastructure is not a bad thing, in my opinion, and economic growth is not the ultimate goal of a reasonable society. You can have mass starvation and economic growth at the same time.

Staring that assertion in the face are the facts that they:

1) Reduce unemployment
2) Increase production
3) Increase demand for other goods (money multiplier)
and if done right..
4) facilitate future investment and consumption
5) Provide sustainable jobs even after the initial expense

And these are the measures that I question. The Chess plan reduces unemployment...technically. It gets people playing Chess, which is "production". 3 is dubious. 4 and 5 are undoubtedly true, if done correctly, as opposed to any old stimulus plan.

You want to increase taxes to raise the money? You see raising taxes (reducing purchasing power) in a recession/depression (when consumption is falling) as viable?

There;s no magic. That increased purchasing power for one person came from some other people, somehow. Unless immediate value is being produced by the stimulus, someone else is losing value.

 

[IchabodPlain]

The Cash for Chess Stimulus Plan was my thought experiment to try and figure out whether this effect is real. It was a case where the government employed people, but at something obviously useless. If you took it to just a little bit more extreme, instead of playing Chess, just give them the money. In other words, institute a high paying welfare system for a portion of the population.

I understood your rationale for the thread. My response is that your program a) doesn't create future investment or consumption b) creates no sustainable jobs.

Economically, Cash for Chess is the same thing as a dole.

No, it isn't. You're employing people. You also are generating short-term productivity because the boards, pieces, timers, etc need to be produced. Being on the "dole", you wouldn't reduce unemployment and the only productivity gains would be through the multiplier effect of circulating greater money through the economy.

However, in one case, GDP rises. In the other case, GDP doesn't rise. The fact that the exact same thing happens, but is measured differently, ought to suggest there's something wrong with the measurement system, and possibly the underlying assumption.

No. The difference is that "on the dole" involves no money to be spent on productivity gains. All of the gains would have to be made via the money multiplier. This doesn't mean the measurement is flawed. It means that in one case you have more productivity than you do in the other.

The underlying assumption is that the money paid in wages would circulate through the economy. Certainly, it would, but any better, or worse, than with some other plan? Consider four possible plans:

1. No stimulus.
2. An intelligent stimulus. (Like 2009's, where real jobs are created by the government)
3. A stupid stimulus. (Like Cash for Chess)
4. High paying welfare.

In terms of circulating money, 2,3, and 4 should all have exactly the same effects.

Yes, assuming the same amount of money is used to pay welfare or wages in all three plans.

The difference between 1 and any of those would be determined by whether the people who have money are somehow not circulating it, but the people who get money would circulate it. That's a bit of a difficult case to demonstrate, it seems to me.

Not quite. In all cases the multiplier applies. It is a constant in any economy. The difference between the first plan and the other three is that less money is being circulated at relatively the same rate.

If you give those folks wages, those dirty scoundrels are likely to pay off their credit cards or prevent foreclosures rather than engage in the consumer culture like we need them to!

Paying off debt or savings is a problem. It destroys wealth. However, the marginal propensity to save/reduce personal debt is lower than it is to consume. Paying down debt/save is more of an issue with large, one time only quantities. People will treat it as money they never had, and either put it in the bank or pay down their debt.

Meanwhile, even in a recession, employers are hiring people.

Well, no. In a recession, employers are cutting jobs. Some may hire people, but in aggregate, the numbers of new-hires are outpaced by job losses.

They aren't hiring all that many people, but they still have to hire people. 2, 3, and 4 all make it more difficult to hire people. Because that's true, all would have at least some short term destimulating effect.

Demonstration that any of the proposals make it more difficult to hire people?

Short term.

Short-term as in what? Specifics would be nice.

If they (stimulus plans) really did that, then increased welfare would also do that. Instead, I think in both cases what they do is compete with private sector employers.

Wrong. I've already addressed the first bit. The second is wrong because the private sector is contracted by the government to complete the projects. In your chess example, it would be the private sector who makes the pieces, board, timers, etc..

Long term investment in infrastructure is not a bad thing, in my opinion, and economic growth is not the ultimate goal of a reasonable society. You can have mass starvation and economic growth at the same time.

Red Herring. I never said the ultimate goal of a reasonable society was economic growth. However, without growth quality of life tends to go down.

And these are the measures that I question. The Chess plan reduces unemployment...technically. It gets people playing Chess, which is "production". 3 is dubious. 4 and 5 are undoubtedly true, if done correctly, as opposed to any old stimulus plan.

By this point, I conclude we aren't communicating well. I said this to BeAChooser in another thread: Employment doesn't measure productivity. Never has. Never will. Do not conflate the two. The Chess plan would reduce unemployment (all things equal) no technically about it. Paying people to play chess does not, in and of itself, create production. Manufacturing the products to play chess does. The multiplier effect is not dubious, it's a central idea in all fields of economics, the Federal Reserve acknowledges it, banks use it, etc..

There;s no magic. That increased purchasing power for one person came from some other people, somehow. Unless immediate value is being produced by the stimulus, someone else is losing value.

No one claimed magic. I am questioning using taxation as opposed to inflation to pay for the proposed stimulus. Using taxation makes the current situation worse - it accelerates a current trend which is detrimental. Borrowing creates inflation, but can be recouped with future productivity gains -- note, it does not accelerate the trend, but reverses it by discouraging people from saving.

 

[Meadmaker]

No, it isn't. You're employing people.

What if I paid them to wait by their mailbox until a check arrives?

Yes, my professional Chess players are employed, but at jobs that produce no value. For the purposes of their effect on the real economy, it's the same thing. People are contributing nothing, but getting paid to do it.

You also are generating short-term productivity because the boards, pieces, timers, etc need to be produced.

A tiny bit. It turns out that people just don't need much to play Chess. A set of those pieces will last a long time, and each player only needs one.

No. The difference is that "on the dole" involves no money to be spent on productivity gains. All of the gains would have to be made via the money multiplier. This doesn't mean the measurement is flawed. It means that in one case you have more productivity than you do in the other.

The Chess based plan versus the dole? One creates productivity? Even the pieces are pretty arguable. Yes, they are goods, but they are goods whose only purpose is to support an "industry", Chess playing, that no one is actually willing to pay for.

A brief digression on GDP. It is used as if it was absolutely equivalent to economic growth, but is it? Next stupid stimulus plan:

I'll pass a law saying that no one is allowed to mow his own lawn. Second, that same law will say that whoever mows your lawn must be paid, and must be paid at least one thousand dollars for the lawn mowing? What would happen. I would work out a deal with my neighbor. He woud mow my lawn. I would mow his. We would each pay each other one thousand dollars, and the result would be exactly the status quo, but the GDP would increase by 2000 dollars. The measurement doesn't match the reality.

So why is it used? Surely all those economists can't be wrong, and they aren't. However, there is an underlying assumption that makes GDP a good measure of economic activity, but people sometimes fail to recognize the assumption. The assumption is that you wouldn't pay for something, and therefore cause that thing to be included in the calculation of GDP, unless you actually wanted it To put it another way, money won't change hands except for something of value. Therefore, measuring how much money is changing hands is a good measure of how much value is being produced.

That's a good measure for the private sector, or even for government programs where the government is actually purchasing something that it thinks will benefit the nation. Again, in that case, they will be seeking good value for the money. If, however, they want to increase GDP, they might end up paying people to play Chess, or build bridges to nowhere. It's important for policy makers to not get caught in that trap, thinking that more economic activity is necessarily the same thing as a healthier economy.

Demonstration that any of the proposals make it more difficult to hire people?

If I wish to hire an employee, but the government is willing to pay him to play Chess, I have to sweeten the deal enough to persuade him that he will be better off, or happier, working for me than playing Chess. If the government won't pay him for Chess, that's one less problem for me.

Short-term as in what? Specifics would be nice.

Let's say two years. (The term of a Congressman.)

In your chess example, it would be the private sector who makes the pieces, board, timers, etc..

A tiny fraction of the cost of the program. The Chess players would be civil servants. (And if they weren't, would they contribute more if they were employed by Haliburton?)

Red Herring. I never said the ultimate goal of a reasonable society was economic growth. However, without growth quality of life tends to go down. [/QUOTE[

No, you asked my why I might approve of a stimulus plan even if I was skeptical that it would lead to economic growth. I answered that it might have benefits other than economic growth.

Employment doesn't measure productivity. Never has. Never will. Do not conflate the two.

I don't intend to. Your list of five items started with 1. Employment, and 2. Productivity, and I said the Chess plan would increase both. And yet, in the case of both those measures, an awful lot of people would question whether we were measuring accurately. Is someone really "employed" to play games, and is it really true that more hours of Chess could ever be said to be greater productivty?

By the way, you keep referring to boards and pieces as if those were examples of production, but keep in mind that a huge portion of GDP is the service sector. The "service" of playing Chess would be the major cost of Cash for Chess. Something that increases the delivery of services would also be said to increase productivity.

Again, going back to GDP, that makes sense, if the services are things people want.

The multiplier effect is not dubious, it's a central idea in all fields of economics, the Federal Reserve acknowledges it, banks use it, etc..

So, if I look for a reputable economist that suggests it is a myth, I won't be able to find one?

Using taxation makes the current situation worse - it accelerates a current trend which is detrimental. Borrowing creates inflation, but can be recouped with future productivity gains -- note, it does not accelerate the trend, but reverses it by discouraging people from saving.

OK. As long as you acknowledge that there is a real cost. Not everyone does.

There were points I didn't address, but I'm not dodging them. I just figured this was long enough already. If there is some point you would like to see addressed, feel free to ask.

 

[Meadmaker]

I got to thinking about the most famous, and successful, "stimulus program" of all time. I'm referring to World War II, which ended the great depression.

Did it help the economy? It certainly solved the distribution problem by achieving full employment. However, before the war, if you had a job, you could buy a car. During the war, you probably did have a job, but you couldn't buy a car. Or tires. Or gas. Or repeat for a whole lot of other stuff. I'm willing to bet new home starts were pretty weak, too, but I haven't looked it up. By any reasonable measure, people were not economically better off, on average, during the war than during the Great Depression.

In some ways, the war was like the Chess stimulus plan, then. Production soared, but it didn't create real wealth. Of course, the difference is that people "wanted" the stuff that was being made. It wasn't just makework production.