1) What if I'm not particularly confident that a Keynesian stimulus will do anything for the economy? Or for that matter, confident that macroeconomists know what they're doing? Am I allowed to complain about it then? (And point out that it looks to me as if politicians are using a 'stimulus package' as an excuse to do what they wanted to do anyway, just like Bush did with his tax cuts back a year or two ago.) I confess that my understanding of Keynesian economics is not perfect, but I find myself highly skeptical of its proposed policies.
2) Just because the government is spending so-and-so much money on something that could be useful doesn't mean that that money will not be wasted. OK, so they're planning on spending $500 million on flood-reduction projects on the Mississippi. My post-facto evaluation of whether that spending is wasteful or not would start with calculating how much flood damage that spending will prevent.
Suppose that the government ends up building a series of advanced levees along endangered areas and prevents floods that could have caused damages upwards of $750 million dollars. Then yes, that sounds like it's not a very wasteful program. ((Of course, it's entirely possible that it could have been possible to prevent that damage with a lower cost or prevent more damage with the same cost, in which case it *is* wasteful compared to the better plan.)) But it's also possible that the end result of the program is a couple of Dixie cups full of cement held together with duct tape and a post-it note labeled 'Nancy Pelosi Memorial Levee' on it. In which case, yes it is wasteful, because even though flood reduction is a good thing, the spending didn't actually accomplish any flood reduction.
Sadly, my evaluation of the competence of government projects to accomplish the ends they are ostensibly designed to accomplish tends more towards the Dixie cup scale of things.
OK, so suppose that Keynesian economic models are perfectly valid, and it really is possible to shock ourselves into higher total productivity through massive government spending, and that the shock effect of this spending is completely independent of the actual output from that government spending. So we could put together a Federal Department for the Copying of Encyclopedias and hire 500,000 people at $100,000 a year to hand-copy the Encyclopedia Britannica and we get some Keynesian stimulus effect from that.
That money is still wasted, because it tied up resources that could have been better used elsewhere. For $100,000 a year, I'd be pretty tempted to apply for a job as an encyclopedia-copier producing absolutely nothing of worth, when I could have been employed doing something productive: writing software code, doing scientific research, etc., etc. That opportunity cost of mine, and every other encyclopedia-copier's time is a real cost, and then same applies to material: concrete and steel used to build empty buildings or useless levees is similarly diverted from useful tasks, and also bears an opportunity cost.
Now, if there are productive government programs, then fine. Let's have 'em. But the choice of whether we want those programs should be based on their value and true cost. What does that have to do with the stimulus? If these are good programs for a stimulus bill, they're good programs otherwise, too. The choice between implementing federal programs A, B, and C shouldn't be coupled to the level of governmental stimulus spending, because the government has other tools to control its level of spending, namely taxes.
If we want to time the spending with taxes, it's easy, and we can do it precisely in a way we can't with all of these other programs. We can target the tax cuts towards those who need it during an economic downturn. (I recommend a payroll tax holiday, at least temporarily getting rid of the stupidest regressive tax we have.)
So why not do whatever economic stimulus with the tax code? It's faster, it's more controllable, and it's fairer. If there are government programs that we need, why let the implementation of those programs be dependent on whether we want to stimulate the economy or not?
So we could put together a Federal Department for the Copying of Encyclopedias and hire 500,000 people at $100,000 a year to hand-copy the Encyclopedia Britannica and we get some Keynesian stimulus effect from that.
That money is still wasted, because it tied up resources that could have been better used elsewhere.
Not really. The opportunity cost argument is an argument for a better stimulus, which I agree with. But remember that we're deficit-spending here. That money would not be spent otherwise. So hand-copying encyclopedias would not be wasting the money. It would give some stimulus effect - just not very much, and if we're gonna deficit-spend, we may as well get something good out of it. So I agree with you that the stimulus would be better if the waste were replaced with more useful programs. However, a stimulus bill with 2.5%, even 10%, waste in it is better than no stimulus bill. It's even better than a slightly smaller stimulus bill with no waste.
when I could have been employed doing something productive: ... doing scientific research
Hey look at that, there's a bunch of money in the stimulus for biomedical research, etc. Looks like a job that might have been lost or never gotten will be propped up by the government so that you can do something useful for society.
If these are good programs for a stimulus bill, they're good programs otherwise, too. The choice between implementing federal programs A, B, and C shouldn't be coupled to the level of governmental stimulus spending, because the government has other tools to control its level of spending, namely taxes.
But if we finance the spending with taxes, then there will be no stimulative effect to the economy, since we're taking that money out of the economy by taxing the consumers (for the purpose of simplicity, I'm assuming that the government and consumers are equally stimulative with the same amount of money, which is not a safe assumption).
So why not do whatever economic stimulus with the tax code?
How much stimulus can you reasonably expect to be able to provide with tax cuts? When the downturn is over, will we be clamoring for a commensurate increase in taxes to not only restore things to their previous level, but higher so that we can pay down our debt (see: tax behavior, Bush)? Granted, this will be an issue even with the current stimulus, but it'll be easier to get those levels of taxes if you aren't starting from an even lower level. If we don't raise taxes again, what happens if there's another downturn? Lower them even further? Where's the limit? At what point do we stop being able to finance our {military, medicare, social security, etc.}?
If there are government programs that we need, why let the implementation of those programs be dependent on whether we want to stimulate the economy or not?
Their implementation is not dependent on whether we need economic stimulus. They're going to get done anyway. The question is whether we need them to provide economic stimulus. If we want them to, we finance it with deficit spending. If not, we tax so we can pay for them. The fact that they are programs we need anyway is a demonstration that they are useful stimulus if financed by the deficit, rather than wasteful.
Their implementation is not dependent on whether we need economic stimulus. They're going to get done anyway. The question is whether we need them to provide economic stimulus. If we want them to, we finance it with deficit spending. If not, we tax so we can pay for them. The fact that they are programs we need anyway is a demonstration that they are useful stimulus if financed by the deficit, rather than wasteful.
Exactly! This is precisely my argument that --- if we're going to have economic stimulus from the government --- we should be doing it by changing taxation levels rather than by changing government consumption. There's no reason why we can't provide whatever stimulus amount we decide is necessary through adjusting taxation amounts, into the negative if necessary.
Okay, let's try a different tact. We have programs that we want to implement, because we think that they will be good for the country. There are three ways to go about implementing/financing them. First is by borrowing (deficit spending), second is by raising taxes (tax and spend), and third is by cutting spending in other areas.
Let's look at the (generalized, theoretical) stimulative effect of each method. Cutting other spending has zero effect, assuming both the new and old spending were equally stimulative. Cutting wasteful spending would be net positive, but there's by no means enough waste to cut to fix this economy, nor is it reasonable to expect that any entity (government, business, consumer, etc.) do their business with zero waste.
Raising taxes to pay for new spending has no stimulative effect, either, and it is more likely than not to have an anti-stimulative effect. You don't want to be raising taxes during a recession (see: Hoover).
Which leaves us with deficit spending. I should amend my quote above to say that "the question is whether we need to provide economic stimulus." If economic stimulus is needed, raising taxes is the last thing we want to do. Deficit spending allows us to have the infrastructure boost we so desperately need and an economic stimulus at the same time.
There's no reason why we can't provide whatever stimulus amount we decide is necessary through adjusting taxation amounts, into the negative if necessary.
Okay, thought experiment time. Assume that the stimulus is $400B in tax cuts and $400B in new spending. Why can't we frame it such that we raise taxes by $400B to finance the new spending (which you're sort of agreeing will get done anyway), and then cutting taxes by $800B to give the necessary stimulus to the economy?
Okay, thought experiment time. Assume that the stimulus is $400B in tax cuts and $400B in new spending. Why can't we frame it such that we raise taxes by $400B to finance the new spending (which you're sort of agreeing will get done anyway), and then cutting taxes by $800B to give the necessary stimulus to the economy?
I think that's a perfect way of framing it. There's two proposals: one for the new spending, and one for the stimulus. But there's no reason for these proposals to be linked in the same bill. There's not really much argument over the need for a stimulus, so the stimulus bill could be passed very quickly without much debate, and have its effect as fast as possible. Then we can have the other bill(s) for the new spending, and spend the necessary time to decide how much of that new spending is productive, and fund it as we make up our minds.
What I think is happening is Congress is pushing the two together so that they can say 'No time to look in any detail into the actual programs we're funding here (and whether or not I'm trying to funnel money to my constituents), because we have to have that stimulus now, now, now!' When if they really did want the stimulus now, they could have it.
But there's no reason for these proposals to be linked in the same bill.
It's so you don't have to think about which taxes to raise and then lower. It's just easier.
You know that if Obama agreed to an $800B tax cut right now (thinking that he'd raise $400B in taxes soon after), the Republicans would call him the new Hoover as soon as he suggested paying for any new spending by raising taxes, and we wouldn't get anything done.
I'll go into Congress's behavior in a comment further down.
How much stimulus can you reasonably expect to be able to provide with tax cuts? When the downturn is over, will we be clamoring for a commensurate increase in taxes to not only restore things to their previous level, but higher so that we can pay down our debt (see: tax behavior, Bush)? Granted, this will be an issue even with the current stimulus, but it'll be easier to get those levels of taxes if you aren't starting from an even lower level. If we don't raise taxes again, what happens if there's another downturn? Lower them even further? Where's the limit? At what point do we stop being able to finance our {military, medicare, social security, etc.}?
Certainly, it's politically easy to lower taxes during a recession but hard to raise them during a boom. But why does the problem get any more easy if you use government consumption as a mechanism for stimulus? Then, during boom times, it's not that you have to raise taxes, it's that you have to cut government programs and fire civil workers. Which is going to be more difficult?
The public's memory is short when it comes to taxes. Remember the uproar about Obama wanting to rescind the Bush tax cuts for those making over $250K? They'd be going back to Clinton's tax levels. Horror of horrors.
In terms of cutting government programs, yes, it's tough to cut them - if they're sold as permanent programs (Medicare, Social Security). I don't have my history books in front of me, but I don't see the WPA around anymore. How hard was it to end that program? Firing civil workers would be hard if that meant the unemployment rate would go up, but in a boom economy, the private sector would be waiting to snatch those workers up.
People always want more money. But they only need one job at a time (usually).
Also, let me go into a little more detail about what I mean by government 'wasting resources,' because I think we're using the terms differently.
Let me give you a few scenarios that could be plausibly said to involve 'waste', and I'll give you my accounting and you can see if you agree.
1) The government imposes an annual 10% wealth tax on people with over $1 million in assets and distributes the income from that tax in direct cash payments to families with incomes under $25,000.
2) The government imposes an annual payroll tax on the first $85,000 of household income and distributes the income from that tax in direct cash payments to individuals with over $1 million in assets.
3) As in (1), but the income from that tax is spent on building homeless shelters in inner cities.
4) As in (2), but the income from that tax is spent on building new and improved aircraft for the military.
5) The government borrows $500 million dollars and distributes that money in direct cash payments to auto workers.
6) The government borrows $500 million dollars and spends that money on hiring laid-off autoworkers to dig a canal from the Rio Grande to the St. Lawrence.
In my accounting, (1), (2), and (5) are all non-wasteful programs. Opinions may vary as to the benefits of these programs, but direct cash transfers from one segment of society to another just redistributes wealth. (3), (4), and (6), however, do not just involve redistributions of wealth, but actually change the use of real resources. In (3), concrete, brick, steel, and labor are turned into homeless shelters. In (4), steel, carbon fiber, and labor get turned into new aircraft. And in (6), shovels and labor get turned into a canal. Those government expenditures mean that that labor, steel, concrete, etc. is not available to the rest of the economy, and that is what gives it the possibility of being wasteful. Is a canal more valuable to us than the labor and capital that went into the building of the canal? If not, then building the canal was a waste of resources, regardless of whether it was financed through higher taxes or through borrowing.
In my accounting, (1), (2), and (5) are all non-wasteful programs.
Or, to nitpick a bit, are largely non-wasteful programs. There's going to be some amount of waste in the labor and capital necessary to handle the administration of these redistribution programs, labor and capital that could have gone towards wealth-creation.
Those government expenditures mean that that labor, steel, concrete, etc. is not available to the rest of the economy, and that is what gives it the possibility of being wasteful.
I'll just note here that you said the possibility of being wasteful. I agree with you. They are not a priori wasteful.
Is a canal more valuable to us than the labor and capital that went into the building of the canal?
Capital comes from the deficit, in this case, so we wouldn't have had it if we didn't borrow it. And what if the alternative to that labor is people standing in the unemployment line? The Keynesian theory assumes that those people would not otherwise have jobs.
Sure. I haven't done much research into what's actually being proposed in the bill, so I don't know for sure what's productive spending and what's not. My sense of things, though, is that a number of politicians are using the stimulus bill to push spending that they couldn't have gotten without it, by posing their special causes as 'stimulus.'
Capital comes from the deficit, in this case, so we wouldn't have had it if we didn't borrow it.
By 'capital' I mean physical resources that are consumed by the spending. And we can't borrow that kind of capital from the future, because we don't have time travel technology yet.
And what if the alternative to that labor is people standing in the unemployment line? The Keynesian theory assumes that those people would not otherwise have jobs.
But unemployed people's time is not worth $0.
Suppose that there's a one-income family with two kids where the man makes $50,000 a year. After the downturn, he lost his job and had to find a new one that makes only $30,000. Because of their lower salary, the woman would now be willing to take a job and work outside the home if she could find something that would pay her at least $15,000 a year. She wouldn't work for less than that because then it wouldn't cover the increased costs for child care and such.
If the government gives her a $20,000 a year job as an encyclopedia copier, then the net accounting is: Government is down $20,000 for her salary The woman is up $20,000 for her salary and is down $15,000 for lost time with her children and child care expenses. On net, it's a $15,000 loss to the economy because of her opportunity costs, and we can get exactly the same result for the woman by just having the government pay her $20,000 and let her do what she wants with it.
Now, if the government hires her at a productive job, then the accounting is different: Government is down $20,000 for her salary, but it's up $25,000 or whatever from the work that she does. She's up $20,000 for her salary, and is down $15,000 for lost time. Now there's a net gain in the economy due to the hiring, because she's doing productive work.
Any time the government uses capital or labor to do unproductive work, we can always make the transaction better for all involved by simply transferring the money that would have been spent on that capital or labor directly to the beneficiaries.
we can get exactly the same result for the woman by just having the government pay her $20,000 and let her do what she wants with it.
So what you're saying is, unproductive work is exactly as effective as tax cuts.
To be slightly less glib, it's not a $15,000 loss to the economy - that $15,000 is going to other people for taking care of her kids. Those people need to buy goods and services too. In fact, making her spend $15,000 on child care could in theory be better for the economy than just giving her a $20,000 check, because she might just save the $20,000 for later (with a total income of $50K, that's unlikely, but still).
Any time the government uses capital or labor to do unproductive work, we can always make the transaction better for all involved by simply transferring the money that would have been spent on that capital or labor directly to the beneficiaries.
You say better, but you only mean having a more streamlined process. It's exactly as effective, economically. It just seems kludgy and wasteful. The downside to simply moving everything unproductive to tax cuts is legislative - you have to go through the bill and decide what is unproductive, and then decide what taxes to cut instead of doing the unproductive spending. Ideally, however, you'd take the unproductive work and replace it with something productive, because, as you say, there's a much higher net gain in the economy when productive work is done. The net gain in the economy in your second example is actually much higher than $20,000, since that $15,000 goes back into the economy.
In fact, I'm going to take your last sentence and modify it a bit - "Any time the government sends money directly to the beneficiaries, we can always make the transaction better for all to use that money to buy labor and capital for productive work." After all, that's what your second example shows.
Yes, it is. That $15,000 worth of her time is gone, she does not get to enjoy it, it is a deadweight loss. There is no compensating benefit. She is spending $15,000 on child care, yes. If she had just been given the money instead, that $15,000 still would have been spent somewhere, and she would still have the value of her time, which is worth $15,000 to her.
No, she wouldn't. Any time that she'd be paying for child care would have been time that she'd be taking care of her kids.
True, the $15,000 would be spent somewhere else (unless she saves it, which is more likely with a big check), but either way it's going back into the economy.
It's true that she'd probably rather spend time with her kids than copying encyclopedias, but time with her kids stimulates the economy just as much as copying encyclopedias, which is to say, not at all. It's better for her if she simply gets a check, but in terms of the economy, it doesn't matter.
1) What if I'm not particularly confident that a Keynesian stimulus will do anything for the economy? Or for that matter, confident that macroeconomists know what they're doing? Am I allowed to complain about it then? (And point out that it looks to me as if politicians are using a 'stimulus package' as an excuse to do what they wanted to do anyway, just like Bush did with his tax cuts back a year or two ago.) I confess that my understanding of Keynesian economics is not perfect, but I find myself highly skeptical of its proposed policies.
2) Just because the government is spending so-and-so much money on something that could be useful doesn't mean that that money will not be wasted. OK, so they're planning on spending $500 million on flood-reduction projects on the Mississippi. My post-facto evaluation of whether that spending is wasteful or not would start with calculating how much flood damage that spending will prevent.
Suppose that the government ends up building a series of advanced levees along endangered areas and prevents floods that could have caused damages upwards of $750 million dollars. Then yes, that sounds like it's not a very wasteful program. ((Of course, it's entirely possible that it could have been possible to prevent that damage with a lower cost or prevent more damage with the same cost, in which case it *is* wasteful compared to the better plan.)) But it's also possible that the end result of the program is a couple of Dixie cups full of cement held together with duct tape and a post-it note labeled 'Nancy Pelosi Memorial Levee' on it. In which case, yes it is wasteful, because even though flood reduction is a good thing, the spending didn't actually accomplish any flood reduction.
Sadly, my evaluation of the competence of government projects to accomplish the ends they are ostensibly designed to accomplish tends more towards the Dixie cup scale of things.
Reply
That money is still wasted, because it tied up resources that could have been better used elsewhere. For $100,000 a year, I'd be pretty tempted to apply for a job as an encyclopedia-copier producing absolutely nothing of worth, when I could have been employed doing something productive: writing software code, doing scientific research, etc., etc. That opportunity cost of mine, and every other encyclopedia-copier's time is a real cost, and then same applies to material: concrete and steel used to build empty buildings or useless levees is similarly diverted from useful tasks, and also bears an opportunity cost.
Now, if there are productive government programs, then fine. Let's have 'em. But the choice of whether we want those programs should be based on their value and true cost. What does that have to do with the stimulus? If these are good programs for a stimulus bill, they're good programs otherwise, too. The choice between implementing federal programs A, B, and C shouldn't be coupled to the level of governmental stimulus spending, because the government has other tools to control its level of spending, namely taxes.
If we want to time the spending with taxes, it's easy, and we can do it precisely in a way we can't with all of these other programs. We can target the tax cuts towards those who need it during an economic downturn. (I recommend a payroll tax holiday, at least temporarily getting rid of the stupidest regressive tax we have.)
So why not do whatever economic stimulus with the tax code? It's faster, it's more controllable, and it's fairer. If there are government programs that we need, why let the implementation of those programs be dependent on whether we want to stimulate the economy or not?
Reply
That money is still wasted, because it tied up resources that could have been better used elsewhere.
Not really. The opportunity cost argument is an argument for a better stimulus, which I agree with. But remember that we're deficit-spending here. That money would not be spent otherwise. So hand-copying encyclopedias would not be wasting the money. It would give some stimulus effect - just not very much, and if we're gonna deficit-spend, we may as well get something good out of it. So I agree with you that the stimulus would be better if the waste were replaced with more useful programs. However, a stimulus bill with 2.5%, even 10%, waste in it is better than no stimulus bill. It's even better than a slightly smaller stimulus bill with no waste.
when I could have been employed doing something productive: ... doing scientific research
Hey look at that, there's a bunch of money in the stimulus for biomedical research, etc. Looks like a job that might have been lost or never gotten will be propped up by the government so that you can do something useful for society.
If these are good programs for a stimulus bill, they're good programs otherwise, too. The choice between implementing federal programs A, B, and C shouldn't be coupled to the level of governmental stimulus spending, because the government has other tools to control its level of spending, namely taxes.
But if we finance the spending with taxes, then there will be no stimulative effect to the economy, since we're taking that money out of the economy by taxing the consumers (for the purpose of simplicity, I'm assuming that the government and consumers are equally stimulative with the same amount of money, which is not a safe assumption).
So why not do whatever economic stimulus with the tax code?
How much stimulus can you reasonably expect to be able to provide with tax cuts? When the downturn is over, will we be clamoring for a commensurate increase in taxes to not only restore things to their previous level, but higher so that we can pay down our debt (see: tax behavior, Bush)? Granted, this will be an issue even with the current stimulus, but it'll be easier to get those levels of taxes if you aren't starting from an even lower level. If we don't raise taxes again, what happens if there's another downturn? Lower them even further? Where's the limit? At what point do we stop being able to finance our {military, medicare, social security, etc.}?
If there are government programs that we need, why let the implementation of those programs be dependent on whether we want to stimulate the economy or not?
Their implementation is not dependent on whether we need economic stimulus. They're going to get done anyway. The question is whether we need them to provide economic stimulus. If we want them to, we finance it with deficit spending. If not, we tax so we can pay for them. The fact that they are programs we need anyway is a demonstration that they are useful stimulus if financed by the deficit, rather than wasteful.
Reply
Exactly! This is precisely my argument that --- if we're going to have economic stimulus from the government --- we should be doing it by changing taxation levels rather than by changing government consumption. There's no reason why we can't provide whatever stimulus amount we decide is necessary through adjusting taxation amounts, into the negative if necessary.
Reply
Let's look at the (generalized, theoretical) stimulative effect of each method. Cutting other spending has zero effect, assuming both the new and old spending were equally stimulative. Cutting wasteful spending would be net positive, but there's by no means enough waste to cut to fix this economy, nor is it reasonable to expect that any entity (government, business, consumer, etc.) do their business with zero waste.
Raising taxes to pay for new spending has no stimulative effect, either, and it is more likely than not to have an anti-stimulative effect. You don't want to be raising taxes during a recession (see: Hoover).
Which leaves us with deficit spending. I should amend my quote above to say that "the question is whether we need to provide economic stimulus." If economic stimulus is needed, raising taxes is the last thing we want to do. Deficit spending allows us to have the infrastructure boost we so desperately need and an economic stimulus at the same time.
There's no reason why we can't provide whatever stimulus amount we decide is necessary through adjusting taxation amounts, into the negative if necessary.
Okay, thought experiment time. Assume that the stimulus is $400B in tax cuts and $400B in new spending. Why can't we frame it such that we raise taxes by $400B to finance the new spending (which you're sort of agreeing will get done anyway), and then cutting taxes by $800B to give the necessary stimulus to the economy?
Reply
I think that's a perfect way of framing it. There's two proposals: one for the new spending, and one for the stimulus. But there's no reason for these proposals to be linked in the same bill. There's not really much argument over the need for a stimulus, so the stimulus bill could be passed very quickly without much debate, and have its effect as fast as possible. Then we can have the other bill(s) for the new spending, and spend the necessary time to decide how much of that new spending is productive, and fund it as we make up our minds.
What I think is happening is Congress is pushing the two together so that they can say 'No time to look in any detail into the actual programs we're funding here (and whether or not I'm trying to funnel money to my constituents), because we have to have that stimulus now, now, now!' When if they really did want the stimulus now, they could have it.
Reply
It's so you don't have to think about which taxes to raise and then lower. It's just easier.
You know that if Obama agreed to an $800B tax cut right now (thinking that he'd raise $400B in taxes soon after), the Republicans would call him the new Hoover as soon as he suggested paying for any new spending by raising taxes, and we wouldn't get anything done.
I'll go into Congress's behavior in a comment further down.
Reply
Certainly, it's politically easy to lower taxes during a recession but hard to raise them during a boom. But why does the problem get any more easy if you use government consumption as a mechanism for stimulus? Then, during boom times, it's not that you have to raise taxes, it's that you have to cut government programs and fire civil workers. Which is going to be more difficult?
Reply
In terms of cutting government programs, yes, it's tough to cut them - if they're sold as permanent programs (Medicare, Social Security). I don't have my history books in front of me, but I don't see the WPA around anymore. How hard was it to end that program? Firing civil workers would be hard if that meant the unemployment rate would go up, but in a boom economy, the private sector would be waiting to snatch those workers up.
People always want more money. But they only need one job at a time (usually).
Reply
Let me give you a few scenarios that could be plausibly said to involve 'waste', and I'll give you my accounting and you can see if you agree.
1) The government imposes an annual 10% wealth tax on people with over $1 million in assets and distributes the income from that tax in direct cash payments to families with incomes under $25,000.
2) The government imposes an annual payroll tax on the first $85,000 of household income and distributes the income from that tax in direct cash payments to individuals with over $1 million in assets.
3) As in (1), but the income from that tax is spent on building homeless shelters in inner cities.
4) As in (2), but the income from that tax is spent on building new and improved aircraft for the military.
5) The government borrows $500 million dollars and distributes that money in direct cash payments to auto workers.
6) The government borrows $500 million dollars and spends that money on hiring laid-off autoworkers to dig a canal from the Rio Grande to the St. Lawrence.
In my accounting, (1), (2), and (5) are all non-wasteful programs. Opinions may vary as to the benefits of these programs, but direct cash transfers from one segment of society to another just redistributes wealth. (3), (4), and (6), however, do not just involve redistributions of wealth, but actually change the use of real resources. In (3), concrete, brick, steel, and labor are turned into homeless shelters. In (4), steel, carbon fiber, and labor get turned into new aircraft. And in (6), shovels and labor get turned into a canal. Those government expenditures mean that that labor, steel, concrete, etc. is not available to the rest of the economy, and that is what gives it the possibility of being wasteful. Is a canal more valuable to us than the labor and capital that went into the building of the canal? If not, then building the canal was a waste of resources, regardless of whether it was financed through higher taxes or through borrowing.
Reply
Or, to nitpick a bit, are largely non-wasteful programs. There's going to be some amount of waste in the labor and capital necessary to handle the administration of these redistribution programs, labor and capital that could have gone towards wealth-creation.
Reply
I'll just note here that you said the possibility of being wasteful. I agree with you. They are not a priori wasteful.
Is a canal more valuable to us than the labor and capital that went into the building of the canal?
Capital comes from the deficit, in this case, so we wouldn't have had it if we didn't borrow it. And what if the alternative to that labor is people standing in the unemployment line? The Keynesian theory assumes that those people would not otherwise have jobs.
Reply
Sure. I haven't done much research into what's actually being proposed in the bill, so I don't know for sure what's productive spending and what's not. My sense of things, though, is that a number of politicians are using the stimulus bill to push spending that they couldn't have gotten without it, by posing their special causes as 'stimulus.'
Capital comes from the deficit, in this case, so we wouldn't have had it if we didn't borrow it.
By 'capital' I mean physical resources that are consumed by the spending. And we can't borrow that kind of capital from the future, because we don't have time travel technology yet.
And what if the alternative to that labor is people standing in the unemployment line? The Keynesian theory assumes that those people would not otherwise have jobs.
But unemployed people's time is not worth $0.
Suppose that there's a one-income family with two kids where the man makes $50,000 a year. After the downturn, he lost his job and had to find a new one that makes only $30,000. Because of their lower salary, the woman would now be willing to take a job and work outside the home if she could find something that would pay her at least $15,000 a year. She wouldn't work for less than that because then it wouldn't cover the increased costs for child care and such.
If the government gives her a $20,000 a year job as an encyclopedia copier, then the net accounting is:
Government is down $20,000 for her salary
The woman is up $20,000 for her salary and is down $15,000 for lost time with her children and child care expenses.
On net, it's a $15,000 loss to the economy because of her opportunity costs, and we can get exactly the same result for the woman by just having the government pay her $20,000 and let her do what she wants with it.
Now, if the government hires her at a productive job, then the accounting is different:
Government is down $20,000 for her salary, but it's up $25,000 or whatever from the work that she does.
She's up $20,000 for her salary, and is down $15,000 for lost time.
Now there's a net gain in the economy due to the hiring, because she's doing productive work.
Any time the government uses capital or labor to do unproductive work, we can always make the transaction better for all involved by simply transferring the money that would have been spent on that capital or labor directly to the beneficiaries.
Reply
So what you're saying is, unproductive work is exactly as effective as tax cuts.
To be slightly less glib, it's not a $15,000 loss to the economy - that $15,000 is going to other people for taking care of her kids. Those people need to buy goods and services too. In fact, making her spend $15,000 on child care could in theory be better for the economy than just giving her a $20,000 check, because she might just save the $20,000 for later (with a total income of $50K, that's unlikely, but still).
Any time the government uses capital or labor to do unproductive work, we can always make the transaction better for all involved by simply transferring the money that would have been spent on that capital or labor directly to the beneficiaries.
You say better, but you only mean having a more streamlined process. It's exactly as effective, economically. It just seems kludgy and wasteful. The downside to simply moving everything unproductive to tax cuts is legislative - you have to go through the bill and decide what is unproductive, and then decide what taxes to cut instead of doing the unproductive spending. Ideally, however, you'd take the unproductive work and replace it with something productive, because, as you say, there's a much higher net gain in the economy when productive work is done. The net gain in the economy in your second example is actually much higher than $20,000, since that $15,000 goes back into the economy.
In fact, I'm going to take your last sentence and modify it a bit - "Any time the government sends money directly to the beneficiaries, we can always make the transaction better for all to use that money to buy labor and capital for productive work." After all, that's what your second example shows.
Reply
Yes, it is. That $15,000 worth of her time is gone, she does not get to enjoy it, it is a deadweight loss. There is no compensating benefit. She is spending $15,000 on child care, yes. If she had just been given the money instead, that $15,000 still would have been spent somewhere, and she would still have the value of her time, which is worth $15,000 to her.
Reply
No, she wouldn't. Any time that she'd be paying for child care would have been time that she'd be taking care of her kids.
True, the $15,000 would be spent somewhere else (unless she saves it, which is more likely with a big check), but either way it's going back into the economy.
It's true that she'd probably rather spend time with her kids than copying encyclopedias, but time with her kids stimulates the economy just as much as copying encyclopedias, which is to say, not at all. It's better for her if she simply gets a check, but in terms of the economy, it doesn't matter.
Reply
Leave a comment