Properly Predicting Prospects of Economic Stimulus Plans
It is amazing to hear those who consider themselves to be wise economists, or who are esteemed by others to be such, discuss economic stimulus tactics. Many of them seem to rant as if a particular school of economic thought, supposedly dignified by way of deriving its name from the name of some famous economist, is always right, and other schools of economic thought which likewise are attached to the name of this or that famous economist, are always wrong, as if the prospect of an economic stimulus plan succeeding could be based upon cleverly understanding which of the famous economists of the past was the smartest.
Fact is that the extent to which a given economic stimulus can be expected to succeed, should depend on an understanding of ignored details that characterize the particular economic situation and the particular economic stimulus that is thrown at that particular economic situation. Thus it is absurd that so-called 'experts' should ignore details that distinguish one economic situation from another, and one intervention from another, and rant as if one school of thought is always right and the other school of thought is always wrong, all based not on a detailed understanding of the economic facts re the given economic situation, all based not on how the details of the given intervention interact with the given economic situation, but rather, all based on insults, assertions not backed by fact or reasoning, generalizations, theories, and the general misconception that the harder an essay is to understand, the wiser it is.
The fact is that money that is spent on economic stimulus programs is money that is diverted from the manner of spending that would occur if the economic stimulus program were not enacted. Thus the effect of the economic stimulus program has to be compared to the effects that would be produced if the economic stimulus were not enacted in the first place. This comparison is accomplished through a comprehension of troublesome yet pompously ignored details regarding the particular economic situation and the particular economic stimulus program being considered.
Money used for economic stimulus is not generated out of thin air. It is obtained through various possible methods: increase of the money supply, taxation of citizens, borrowing from citizens, borrowing from foreigners. (The creation of money is similar to a defacto flat tax upon all those who possess the currency whose quantity is being increased; when money is printed up, the value of a given unit of the money declines). Thus the question becomes, how will the economy function if the economic stimulus is enacted, compared to how it would have functioned if the economic stimulus were not enacted? One has to look at the various uses to which money could be put, and how the enactment of the economic stimulus program under consideration effects such uses.
A citizen could simply hide cash under his mattress, or hold on to material assets such as various objects that have economic value. An economic stimulus package could produce effects such as inflation, increasing the incentive to cease from simply hoarding cash and to circulate the hoarded money instead, one result being that the money chain reaction fashion produces income and sales for citizens/residents as it travels from person to person, another result being that the money could fall into the hands of someone who spends it on imports from foreign nations or who travels to a foreign nation and spends it there. Such release of money into the economy would produce some inflationary effect. The net effect of the economic stimulus program in terms of changing the economy through the effect on hoarding of cash etc., would depend upon troublesome pesky facts such as: the extent to which there is hoarding in the economy, the extent to which the citizenry spends money on imports, and the extent to which the hoarding is effected by the economic stimulus package.
If no economic stimulus package was enacted, citizens would themselves spend part of the money that would be spent funding the economic stimulus package, by buying from other citizens, or by buying from foreigners, purchasing imports. The effect of the economic stimulus package if it were to be enacted, would be related to the extent to which the economic stimulus package increased or diminished domestic citizen to citizen financial transaction and domestic citizen purchasing imports transaction. Such increase or decrease depends upon pesky details (details apparently beneath the grandiloquent dignity of some alleged 'experts') regarding the particular economic stimulus program being considered, and regarding the particular economy that the economic stimulus program is directed at. It could be that the economic stimulus package transfers spending power from those who are more inclined to spend money on imports to those who are less inclined to spend the transferred money on imports; or the opposite could hold true. It would be an oversimplification (see http://economix.blogs.nytimes.com/2008/10/24/does-the-democrats-stimulus-package-make-economic-sense/ ) to exult over how due to the economic stimulus package, the money has been transferred from someone who would have spent it on despised luxurious imports, to the noble govt who has spent the money hiring a citizen, because the citizen who receives the money might spend the money on imports or end up using the money to buy from someone who proceeds to take the money and then spend it on imports himself.
If no economic stimulus program was enacted, the money taken by the govt to use on the economic stimulus program could be used by the citizens to loan money to their fellow citizens; if an economic stimulus program was enacted, citizens could end up with money spent due to the economic stimulus program and use it to loan to their fellow citizens also anyway, even if the govt did not use the money to loan to citizens. The extent to which the economic stimulus program would effect such citizen to citizen lending depends on annoying plebeian details such as: the details of the particular stimulus program enacted; the behavioral characteristics of the individuals composing the particular economy the stimulus program is directed at; the extent to which banks keep a certain percentage of the money they loan as reserves; the differences between the individuals who would get money as it circulates through the economy if a stimulus plan is enacted compared to if a stimulus plan is not enacted. An economic 'stimulus' program could have the negative long-term effect of interfering with the positive effects produced by citizens replacing foreign creditors as sources of credit. Fact is that since those who receive loans proceed to spend or invest the borrowed money, the economic stimulus program would not have the magical effect of introducing into circulation for buying and spending, money that otherwise would have been allegedly unavailable for buying and spending had it been loaned by citizens to fellow citizens.
If no economic stimulus program was enacted, citizens could use the money that would otherwise have been used by the govt for the economic stimulus program, to invest in companies owned by their fellow citizens; they could get a percentage share of profits in exchange for such investments. The companies they invest in would spend or loan or invest the invested money thereby circulating it into the economy. Thus domestic ownership replacing foreign ownership could increase the long term strength of the economy, in a way that could be impaired if the government were to take the money and spend it on an economic 'stimulus' program. The balance between short term benefits of the economic stimulus program and long term benefits of investment would depend upon irritatingly boring details such as the individual characteristics of the particular economy and particular economic 'stimulus' program being considered.
Relevant to this is the apparently simplistic enthusiasm of persons like Palin for tax-cuts to energize small business growth which they consider to be the engine of the national economy. Citizens would still be able to get money to invest in the enterprises of their fellow citizens if an economic stimulus program using the money of citizens was enacted by the government, because they would get their hands on the money as it circulated through the economy after being spent by the government. When successful small businesses are created, they take revenues away from other businesses that already exist. This leads to a transfer of profits and employees from businesses that already exist to new businesses. What is required for the purpose of economic growth is investment that increases productivity of employees in terms of productivity per dollar paid, and also (my new cutting-edge idea) productivity per hour worked. What boosts the small business sector is increases in money flowing in the direction of the small business sector as a whole so as to increase the small business sector's total sales and employment. If the small business sector uses its profits to spend excessively on imports, such does not constitute acting as an excellent engine of national economic growth.
If no economic stimulus program was enacted, citizens could use the money that otherwise would be spent on the economic stimulus program, to loan money to foreigners, and to invest in companies that manufacture or produce services either here or abroad and make sales to foreigners. This kind of economic behavior could act as a sponge to soak up money out of the world and into the nation; this sponge-like effect could be interfered with by an economic stimulus program, despite the fact that citizens could obtain money as it flowed through the economy after the govt spent this money on an economic stimulus program and then proceed to loan money to foreigners or invest the money in companies that sell to foreigners. It is possible that circumstances are such that citizens and the nation would be better off not loaning to foreigners or investing in processes depending on sales to foreigners for profit, because what the future holds is that such investments will not pan out well. There might be a short-term boost to the economy canceled out by negative long term effects due to the government interfering to some extent in the sponge-like loans to foreigners etc.; money that otherwise would have been loaned to foreigners, could end up due to the economic stimulus program, in the hands of persons who spend excessively on imports. In the short term, the money loaned to foreigners, would circulate outside the nation, in foreign nations (one can understand this if one is able to look at the international train of events as economic forces produce economic forces in a chain reaction, as opposed to being deceived by for example where the dollar goes after the foreigner loaned the dollar trades it in for another currency, the important thing is what the foreigner does with the money he gets after he trades in the dollar*). The extent to which the positive short and long term effects of govt taking money for a stimulus program balance out the negative short and long term effects with regards to the particular subject of interference in loans to foreigners and investment in sales to foreigners, again depends upon the details regarding the particular economy and particular stimulus program being looked at.
If no economic stimulus program was enacted, citizens would be able to use the money that otherwise would have gone to the government for the economic stimulus program, to pay off debts held by foreigners. A similar situation but somewhat different would exist as citizens got their hands on money flowing through the economy due to a stimulus program. Paying off the debts to foreigners could cause short term weakness followed by long term strength. Again the short and long term positive vs negative effect of the stimulus program in this regard depends on the state of the given economy at the given time and the details of the stimulus program enacted.
I could go on with examples of how the negative and positive effects of using money for a stimulus program are effected by details regarding the state of the economy in question at the given time and the unique characteristics of the economic stimulus program that is utilized, but I spare you.
When the economy in question is not leaking money through trade deficits etc, stimulus programs are more likely to do things like increase short term prosperity, this being evenly balanced out by a decrease in long term prosperity; or, increase short term prosperity without damaging long term prosperity; or, increase both long and short term prosperity. When the economy is not leaking money stimulus can be produced by transferring money from those who indulge excessively in purchasing imports to those who purchase domestically produced goods and services. When the economy is leaking money due to a trade deficit as the USA economy is now, there is an increased likelihood of economic stimulus programs at best having no positive effect. Problem is that money can end up being transferred from those who use it to build up the national economy to those who bleed it away spending it on imports.
Academics, people in general, seem to tend to idolize the 'great men' (often deceased) of the past and like inquisitioners, persecute those who come up with new ideas in the present. Problem with this is that what was an excellent plan years ago may be a bad plan in the present given the changes the national and the world economy have gone through. The United States 25 years ago, was a nation whose exports approximately equaled its imports. Now for many years the United States has been a nation which has imported far more than it has exported.
People like to sit back in their easy chairs and come up with stunningly brilliant theories and pretend that their laconic concise brilliance has solved everything, but when it comes to predicting the effects of economic stimulus programs, what is required is boring tiring work such as data acquisition and analysis, empiricism, an understanding that the important thing is not the theories of Keynes or of his antagonist, but rather an understanding of the unique characteristics of the economy in question and of the economic stimulus program being considered.
It is simple minded to say that simply transferring money from one group of citizens to another will somehow automatically stimulate the economy into health; this kind of thinking distracts attention from interventions that would actually accomplish something. At the same time, it is simplistic to say that there is no such thing as a government sponsored transfer of income and/or wealth that succeeds in actually improving the health of the economy.
* If an American, Joe, loans a Frenchman, Francois, 10 dollars, and Francois trades the 10 dollars to Pierre for 20 Francs, after the currency trade the fact remains that the new thing in France and in the world, is still that Francois has 10 dollars of buying power that he did not have before. Then when Francois uses 2 of the dollars ( in the form of 4 of the Francs he got from Pierre) to buy a haircut from Trudeau, one can see that the chain reaction of economic forces has been from Joe to Francois to Trudeau, not from Joe to Francois to Pierre. The inability of even those Americans who consider themselves to have superior intelligence to understand such concepts has to say the least damaged the US economy.
@2008 David Virgil Hobbs
Fact is that the extent to which a given economic stimulus can be expected to succeed, should depend on an understanding of ignored details that characterize the particular economic situation and the particular economic stimulus that is thrown at that particular economic situation. Thus it is absurd that so-called 'experts' should ignore details that distinguish one economic situation from another, and one intervention from another, and rant as if one school of thought is always right and the other school of thought is always wrong, all based not on a detailed understanding of the economic facts re the given economic situation, all based not on how the details of the given intervention interact with the given economic situation, but rather, all based on insults, assertions not backed by fact or reasoning, generalizations, theories, and the general misconception that the harder an essay is to understand, the wiser it is.
The fact is that money that is spent on economic stimulus programs is money that is diverted from the manner of spending that would occur if the economic stimulus program were not enacted. Thus the effect of the economic stimulus program has to be compared to the effects that would be produced if the economic stimulus were not enacted in the first place. This comparison is accomplished through a comprehension of troublesome yet pompously ignored details regarding the particular economic situation and the particular economic stimulus program being considered.
Money used for economic stimulus is not generated out of thin air. It is obtained through various possible methods: increase of the money supply, taxation of citizens, borrowing from citizens, borrowing from foreigners. (The creation of money is similar to a defacto flat tax upon all those who possess the currency whose quantity is being increased; when money is printed up, the value of a given unit of the money declines). Thus the question becomes, how will the economy function if the economic stimulus is enacted, compared to how it would have functioned if the economic stimulus were not enacted? One has to look at the various uses to which money could be put, and how the enactment of the economic stimulus program under consideration effects such uses.
A citizen could simply hide cash under his mattress, or hold on to material assets such as various objects that have economic value. An economic stimulus package could produce effects such as inflation, increasing the incentive to cease from simply hoarding cash and to circulate the hoarded money instead, one result being that the money chain reaction fashion produces income and sales for citizens/residents as it travels from person to person, another result being that the money could fall into the hands of someone who spends it on imports from foreign nations or who travels to a foreign nation and spends it there. Such release of money into the economy would produce some inflationary effect. The net effect of the economic stimulus program in terms of changing the economy through the effect on hoarding of cash etc., would depend upon troublesome pesky facts such as: the extent to which there is hoarding in the economy, the extent to which the citizenry spends money on imports, and the extent to which the hoarding is effected by the economic stimulus package.
If no economic stimulus package was enacted, citizens would themselves spend part of the money that would be spent funding the economic stimulus package, by buying from other citizens, or by buying from foreigners, purchasing imports. The effect of the economic stimulus package if it were to be enacted, would be related to the extent to which the economic stimulus package increased or diminished domestic citizen to citizen financial transaction and domestic citizen purchasing imports transaction. Such increase or decrease depends upon pesky details (details apparently beneath the grandiloquent dignity of some alleged 'experts') regarding the particular economic stimulus program being considered, and regarding the particular economy that the economic stimulus program is directed at. It could be that the economic stimulus package transfers spending power from those who are more inclined to spend money on imports to those who are less inclined to spend the transferred money on imports; or the opposite could hold true. It would be an oversimplification (see http://economix.blogs.nytimes.com/2008/10/24/does-the-democrats-stimulus-package-make-economic-sense/ ) to exult over how due to the economic stimulus package, the money has been transferred from someone who would have spent it on despised luxurious imports, to the noble govt who has spent the money hiring a citizen, because the citizen who receives the money might spend the money on imports or end up using the money to buy from someone who proceeds to take the money and then spend it on imports himself.
If no economic stimulus program was enacted, the money taken by the govt to use on the economic stimulus program could be used by the citizens to loan money to their fellow citizens; if an economic stimulus program was enacted, citizens could end up with money spent due to the economic stimulus program and use it to loan to their fellow citizens also anyway, even if the govt did not use the money to loan to citizens. The extent to which the economic stimulus program would effect such citizen to citizen lending depends on annoying plebeian details such as: the details of the particular stimulus program enacted; the behavioral characteristics of the individuals composing the particular economy the stimulus program is directed at; the extent to which banks keep a certain percentage of the money they loan as reserves; the differences between the individuals who would get money as it circulates through the economy if a stimulus plan is enacted compared to if a stimulus plan is not enacted. An economic 'stimulus' program could have the negative long-term effect of interfering with the positive effects produced by citizens replacing foreign creditors as sources of credit. Fact is that since those who receive loans proceed to spend or invest the borrowed money, the economic stimulus program would not have the magical effect of introducing into circulation for buying and spending, money that otherwise would have been allegedly unavailable for buying and spending had it been loaned by citizens to fellow citizens.
If no economic stimulus program was enacted, citizens could use the money that would otherwise have been used by the govt for the economic stimulus program, to invest in companies owned by their fellow citizens; they could get a percentage share of profits in exchange for such investments. The companies they invest in would spend or loan or invest the invested money thereby circulating it into the economy. Thus domestic ownership replacing foreign ownership could increase the long term strength of the economy, in a way that could be impaired if the government were to take the money and spend it on an economic 'stimulus' program. The balance between short term benefits of the economic stimulus program and long term benefits of investment would depend upon irritatingly boring details such as the individual characteristics of the particular economy and particular economic 'stimulus' program being considered.
Relevant to this is the apparently simplistic enthusiasm of persons like Palin for tax-cuts to energize small business growth which they consider to be the engine of the national economy. Citizens would still be able to get money to invest in the enterprises of their fellow citizens if an economic stimulus program using the money of citizens was enacted by the government, because they would get their hands on the money as it circulated through the economy after being spent by the government. When successful small businesses are created, they take revenues away from other businesses that already exist. This leads to a transfer of profits and employees from businesses that already exist to new businesses. What is required for the purpose of economic growth is investment that increases productivity of employees in terms of productivity per dollar paid, and also (my new cutting-edge idea) productivity per hour worked. What boosts the small business sector is increases in money flowing in the direction of the small business sector as a whole so as to increase the small business sector's total sales and employment. If the small business sector uses its profits to spend excessively on imports, such does not constitute acting as an excellent engine of national economic growth.
If no economic stimulus program was enacted, citizens could use the money that otherwise would be spent on the economic stimulus program, to loan money to foreigners, and to invest in companies that manufacture or produce services either here or abroad and make sales to foreigners. This kind of economic behavior could act as a sponge to soak up money out of the world and into the nation; this sponge-like effect could be interfered with by an economic stimulus program, despite the fact that citizens could obtain money as it flowed through the economy after the govt spent this money on an economic stimulus program and then proceed to loan money to foreigners or invest the money in companies that sell to foreigners. It is possible that circumstances are such that citizens and the nation would be better off not loaning to foreigners or investing in processes depending on sales to foreigners for profit, because what the future holds is that such investments will not pan out well. There might be a short-term boost to the economy canceled out by negative long term effects due to the government interfering to some extent in the sponge-like loans to foreigners etc.; money that otherwise would have been loaned to foreigners, could end up due to the economic stimulus program, in the hands of persons who spend excessively on imports. In the short term, the money loaned to foreigners, would circulate outside the nation, in foreign nations (one can understand this if one is able to look at the international train of events as economic forces produce economic forces in a chain reaction, as opposed to being deceived by for example where the dollar goes after the foreigner loaned the dollar trades it in for another currency, the important thing is what the foreigner does with the money he gets after he trades in the dollar*). The extent to which the positive short and long term effects of govt taking money for a stimulus program balance out the negative short and long term effects with regards to the particular subject of interference in loans to foreigners and investment in sales to foreigners, again depends upon the details regarding the particular economy and particular stimulus program being looked at.
If no economic stimulus program was enacted, citizens would be able to use the money that otherwise would have gone to the government for the economic stimulus program, to pay off debts held by foreigners. A similar situation but somewhat different would exist as citizens got their hands on money flowing through the economy due to a stimulus program. Paying off the debts to foreigners could cause short term weakness followed by long term strength. Again the short and long term positive vs negative effect of the stimulus program in this regard depends on the state of the given economy at the given time and the details of the stimulus program enacted.
I could go on with examples of how the negative and positive effects of using money for a stimulus program are effected by details regarding the state of the economy in question at the given time and the unique characteristics of the economic stimulus program that is utilized, but I spare you.
When the economy in question is not leaking money through trade deficits etc, stimulus programs are more likely to do things like increase short term prosperity, this being evenly balanced out by a decrease in long term prosperity; or, increase short term prosperity without damaging long term prosperity; or, increase both long and short term prosperity. When the economy is not leaking money stimulus can be produced by transferring money from those who indulge excessively in purchasing imports to those who purchase domestically produced goods and services. When the economy is leaking money due to a trade deficit as the USA economy is now, there is an increased likelihood of economic stimulus programs at best having no positive effect. Problem is that money can end up being transferred from those who use it to build up the national economy to those who bleed it away spending it on imports.
Academics, people in general, seem to tend to idolize the 'great men' (often deceased) of the past and like inquisitioners, persecute those who come up with new ideas in the present. Problem with this is that what was an excellent plan years ago may be a bad plan in the present given the changes the national and the world economy have gone through. The United States 25 years ago, was a nation whose exports approximately equaled its imports. Now for many years the United States has been a nation which has imported far more than it has exported.
People like to sit back in their easy chairs and come up with stunningly brilliant theories and pretend that their laconic concise brilliance has solved everything, but when it comes to predicting the effects of economic stimulus programs, what is required is boring tiring work such as data acquisition and analysis, empiricism, an understanding that the important thing is not the theories of Keynes or of his antagonist, but rather an understanding of the unique characteristics of the economy in question and of the economic stimulus program being considered.
It is simple minded to say that simply transferring money from one group of citizens to another will somehow automatically stimulate the economy into health; this kind of thinking distracts attention from interventions that would actually accomplish something. At the same time, it is simplistic to say that there is no such thing as a government sponsored transfer of income and/or wealth that succeeds in actually improving the health of the economy.
* If an American, Joe, loans a Frenchman, Francois, 10 dollars, and Francois trades the 10 dollars to Pierre for 20 Francs, after the currency trade the fact remains that the new thing in France and in the world, is still that Francois has 10 dollars of buying power that he did not have before. Then when Francois uses 2 of the dollars ( in the form of 4 of the Francs he got from Pierre) to buy a haircut from Trudeau, one can see that the chain reaction of economic forces has been from Joe to Francois to Trudeau, not from Joe to Francois to Pierre. The inability of even those Americans who consider themselves to have superior intelligence to understand such concepts has to say the least damaged the US economy.
@2008 David Virgil Hobbs
posted by David Virgil at 4:22 AM
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