Another Stupid Stimulus Plan - Jobs, Keynes, and Chess

[tyr_13]

I think stimulus jobs should always be used to create things that are need, at least potentially useful, OR cool.

I hate hearing things like, "If all the concrete used in this building were laid out two inches thick, it could circle the world three times." We let's ****ing do that. Where are the cool monument buildings huh? Why don't we build a floating city with fish farms, solar cells, and algae tubes all over it? Where is the canal to cut Florida off from the rest of the states, with a giant stone wall on one side, and electrified wall toppers?

Or we could fix some levies and sewer lines. Someone told me those were useful for something.

 

[Meadmaker]

Been done. The Williamson Tunnels up in liverpool are generaly thought to be an example and there are a bunch of things over in ireland.

The theory is that job creation schemes shouldn't do any useful work since that prevents the market from doing it and providing further employment. The validity of this theory is questionable.

But there are people who actually took this theory seriously enough to spend the money? And admitted that was what they were doing?

 

[geni]

But there are people who actually took this theory seriously enough to spend the money? And admitted that was what they were doing?

Sure the Irish Roads to nowhere.

The Williamson Tunnels are a more complex case.

 

[Meadmaker]

Sure the Irish Roads to nowhere.

The famine era roads? I was thinking about bringing those up. But were they a stimulus concept, or a charity concept? I thought the idea was that the government wanted to feed the starving, but they were afraid of just giving the money/food to idlers, so they set them to work building roads, whether they needed them or not.

 

[Meadmaker]

I stated much of this in post 26. As far as the last sentence -- you'll have to define "real" economic output. Is real anything of value? If you're shaking your head yes, then most government plans which raise GDP are producing things which have real economic value.

Fortunately, that is the case, and to the extend that it is true, I don't object to them, all that much. I just doubt their ability to stimulate. In other words, if you need a road and you build a road, then you end up paying for a road and getting one, and that's it. I question whether the act of building a road will somehow stimulate a great deal of other activity that would not have been stimulated.

Sure, the specific spending of money will be modified, but I question whether the "stimulated" spending isn't just a shift from one spot to another. It's a bit like publicly subsidized sports stadiums. They are justified by saying that the existence of the stadium brings in all sorts of business, and look at all that tax revenue those businesses generate. However, does it really increase entertainment spending, or does it tend to concentrate that spending in a particular locale?

Could you please expand on the second scenario (bonds)?

No one keeps currency under their mattress anymore. Therefore, all the money used to buy bonds would have been used for something else if the bonds weren't available. In other words, if the US magically balanced its budget, paid off its debt, and had no need to sell bonds, then a person who bought a savings bond or a T-Bill would have to do something else with that money. He might spend it, in which case it would go into the C part of GDP, or he might invest it in a private company, in which case it goes into I, or he might put it in a bank, in which case it facilitates lending for consumer goods or business loans, increasing both C and I.

However, since there's this safe, low risk, investment, it goes to the government to help pay its bills.

 

[geni]

The famine era roads? I was thinking about bringing those up. But were they a stimulus concept, or a charity concept? I thought the idea was that the government wanted to feed the starving, but they were afraid of just giving the money/food to idlers, so they set them to work building roads, whether they needed them or not.

The roads in many cases were deliberately useless. Since islands economy was entirely agricultral based their actions were effectively the equiverlent of a modern stimulus.

 

[MikeMangum]

The US grew rapidly during WW2, not in the decade after. In fact real US GDP per person did not get back to its 1945 level until more than a decade later.

I have one quibble with this. Yes, GDP per capita was higher during WWII, but that certainly doesn't mean people were wealthier or had better standards of living. GDP per capita doesn't directly measure standards of living but total economic output. Yes, total economic output was higher during the war than after the war, but much of the economic activity during the war was 1) financed by unsustainable public debt, 2) the production of things that did not improve standards of living. Building massive quantities of tanks, bombers, Higgins boats, fighter planes, rifles, artillery shells etc. did not increase standards of living. It is, after all, difficult to be wealthy when many basic items are rationed.

So while GDP per capita might indeed have been higher during the war, the standard of living was higher after the war, in spite of the fact that there was a massive public debt to pay down.

 

[IchabodPlain]

Fortunately, that is the case, and to the extend that it is true, I don't object to them, all that much. I just doubt their ability to stimulate. In other words, if you need a road and you build a road, then you end up paying for a road and getting one, and that's it. I question whether the act of building a road will somehow stimulate a great deal of other activity that would not have been stimulated.

To the question of whether infrastructure spending stimulates the economy, the answer is clear. If you build a road to a town/city/island/whatever, you are opening up routes for shippping goods in an area where you would have been previously unable to do so. As a localized example, before bridges were built to Clearwater Beach, moving goods/services/people to the island could only be done by boat. As the first bridge was constructed, commercial freights, plummers, electricians, tourists, etc.. could easily travel to the island, and facilitate the growth which now enables Clearwater Beach to be the most recognizable icon of the city, and the most profitable. Moving into a macro-view, having something such as the interstate system facilitated interstate travel to all areas of the country, and having the same effects on a national scale. As a historical example, when rail lines were first brought to the midwest (or west back then) in the 18th century, the economic impact of more farmland, more people, and need for goods and services to support those people, was enormous -- without infrastructure expansions, the odds that you would be living today in Michigan is quite small.

Now, obviously there are diminishing returns to infrastructure expansions. The fifth and sixth bridge to Clearwater Beach will not yield the same results as the first or second, because there is already access to the market. This is why I have used infrastructure as something that was used in the past as an example of stimulus, while at the same time do not advocate expanding infrastructure now as a stimulus for the present.

I could, however, see investing in energy as a present day possibility. By reducing the need for importing oil, you would see long-term GDP impact because improving export/import ratios positively influence GDP growth. Also, if a given technology were developed here and was able to be exported, the ratio would move even faster, shifting to more exports and less imports in that sector. Investing stimulus money here also brings jobs (some of which will be sustainable, because someone must remain to maintain the facilities after a plant is built), and increased production because the facilities need to be built and technologies developed.

Sure, the specific spending of money will be modified, but I question whether the "stimulated" spending isn't just a shift from one spot to another.

The likelihood is that it will not. This is because you are spending more than you are taking in (borrowing) to pay for the stimulus. If you were to increase taxes to pay for the stimulus, your above statement would probably be true, and, in fact, it would not be a shift but a reduction. This is because of inefficient lags of government, which must pay to collect, decide, and distribute the money, so not all of what was originally taxed would make it to stimulus.

It's a bit like publicly subsidized sports stadiums. They are justified by saying that the existence of the stadium brings in all sorts of business, and look at all that tax revenue those businesses generate. However, does it really increase entertainment spending, or does it tend to concentrate that spending in a particular locale?

I don't know if this analogy is apt, especially concerning borrowing to pay for spending as opposed to taxing to pay for it. What city governments will say, however, is that building the sports stadium will benefit consumption and investment for future decades. This is a bit off-topic, but I disagree with your analogy.

No one keeps currency under their mattress anymore. Therefore, all the money used to buy bonds would have been used for something else if the bonds weren't available. In other words, if the US magically balanced its budget, paid off its debt, and had no need to sell bonds, then a person who bought a savings bond or a T-Bill would have to do something else with that money. He might spend it, in which case it would go into the C part of GDP, or he might invest it in a private company, in which case it goes into I, or he might put it in a bank, in which case it facilitates lending for consumer goods or business loans, increasing both C and I.

However, since there's this safe, low risk, investment, it goes to the government to help pay its bills.

Ah, I see what you're saying now, thanks for expaining it in further detail.

 

[Meadmaker]

To the question of whether infrastructure spending stimulates the economy, the answer is clear.

I agree, and energy spending, if indeed we are ready with the technology, would be a great investment. (But then again, if it's so great, why would we have to use public money? Couldn't corporations do it for profit?)

I guess I'm not clear on what part of the "stimulus" I question. There are two reasons cited for having a stimulus package. One is to create or improve needed infrastructure. I think that's great. The other is to put money into workers' hands, on the theory that those workers spending the money will create a whole lot of other demand which otherwise wouldn't exist, and the "multiplier" would spur economic growth. That's the part I doubt.

 

[IchabodPlain]

I agree, and energy spending, if indeed we are ready with the technology, would be a great investment. (But then again, if it's so great, why would we have to use public money? Couldn't corporations do it for profit?).

I suppose it depends on which tecnology you're referring to. On many fronts, there is a need for developing technology (solar, geo-thermal, wind). On others, of which nuclear is the clearest case, the technology is there. In many of these technologies, one of the major problems is that of initial investment. Generating the appropriate revenue to build a power plant is quite steep. There are also regulatory hurdles which must be crossed.

I guess I'm not clear on what part of the "stimulus" I question.

Neither am I.

There are two reasons cited for having a stimulus package. One is to create or improve needed infrastructure. I think that's great.

It's not just creating or improving infrastructure for the hell of it. It's that these sectors are the most likely to have long term value, hence, the greatest bang for our buck.

The other is to put money into workers' hands, on the theory that those workers spending the money will create a whole lot of other demand which otherwise wouldn't exist, and the "multiplier" would spur economic growth. That's the part I doubt

You're own personal incredulity is really not enough. You've yet to put forth an argument, nor have you provided one from someone else, that states why the money multiplier has no positive gain on the economy.

The argument in favor is clear. When you recieve your paycheck, you buy things. The places from which you buy things must also buy things (including labor). Money is recycled then from your pocket, to a company's or individual's pocket, into other companies or individuals pocket, and so forth. This recycling does spur growth unequivocally. What a stimulus plan does is increase the supply of money that is being recycled. This does spur growth, and does create inflation. The growth happens first because money moves faster than prices can respond. After they do respond, the result is inflation. In a pinch (recession), you would generally choose growth because that is what the economy desperately needs, while the inflation can be mitigated in the future by gains in productivity.

 

[Meadmaker]

This does spur growth, and does create inflation. The growth happens first because money moves faster than prices can respond. After they do respond, the result is inflation. In a pinch (recession), you would generally choose growth because that is what the economy desperately needs, while the inflation can be mitigated in the future by gains in productivity.

So you're counting on the time lag between the increased money supply and the decreased prices. Well, it could work. If conditions are fundamentally sound, but the economy got "stuck", that could kick you out of it. Of course, if the real problem is something more fundamental than a temporary lag in consumer confidence, the inflation comes along anyway, and everyone is in extra bad shape.

Meanwhile, you took away wealth from anyone with a savings account or dollar denominated investment (such as all of your bondholders).

The alternative is to put up with the pain until the private sector finds a way to employ people, which it will, given time.


I'm not going to say that one set of policies is always better than the other, but it does seem to me that the inflation funded stimulus plans such as you described had better work quickly, or they won't work at all, but they will sap wealth from everyone.