Thursday, 25 March 2010

Important people can’t stick ordinary people.

The ultimate source of all demand is households: ordinary people – Mr & Mrs Average. Plus the basic purpose of economic activity is to produce what households want. Thus when an increase in aggregate demand is required it should be pretty obvious who needs to be given extra spending power: households. That is, it is Main Street rather than Wall Street that should get the extra funds.

Give households extra funds and they’d spend more. Businesses would compete for this extra demand. And businesses with healthy order books are a good bet for any bank looking for someone to lend money to. Simple.

But no: this would be TOO simple. Economists cannot while away their hours in academic ivory towers erecting useless mathematical models based on this sort of simple stuff. So there are plenty of economists don’t like the idea.

And smartly dressed Wall Steet and City of London bankers don’t like the above simple idea: they want direct access to the extra money, Goldman Sachs in particular.

Large banks are clearly incompetent. Moreover, ordinary people to a significant extent act as banks: that is, people lend money to each other. I’ve just lent my niece money to buy a house and a friend of mine has just borrowed money off his mother to buy a van for his business. If government is going to help “banks”, there is no justification whatsoever for large banks getting any sort of preferential treatment over “ordinary people acting as banks”.

Politicians (most of whom couldn’t run a MacDonald’s restaurant) are all self appointed experts in running something a thousand times the size of the entire MacDonald’s chain: the entire economy. Moreover, they are apparently able to do this without having accumulated the knowledge of the subject required of those at the end of their first year in a university economics course.

Politicians all have their own pet schemes for “stimulating the economy”: extra investment, “shovel ready” projects, etc. These “shovel ready” projects would of course do all sorts of socially useful things: the sort of things that local and state government employees were already doing before they were sacked because of the recession. Mad or what?

The there is the $2bn “give away” to builders in the U.S. - when there is a surplus of builders and existing houses cannot be sold !!!!

The UK’s finance minister, Alistair Darling has just announced £2.5bn worth of support for small firms, including a scheme to force banks to lend to small firms. That should keep a few thousand bureaucrats and other unproductive paper pushers employed.

And then in the U.S. there is the payroll tax credit which will result in the creation of about as many jobs for foreigners as U.S. citizens.

Next on this list of shambolic schemes is the Home Affordable Foreclosure Alternative (a scheme in the U.S. for helping those in arrears with mortgage payments, and which by the looks of it won’ work). Plus see here and here.

And we mustn’t forget the farce that is cash for clunkers.

Meanwhile, house repossessions skyrocket.

Two mutually exclusive criticisms are normally made by important people of the idea that ordinary people be given stimulus money. First, households will just save the money, and second, they’ll spend too much, which would be inflationary. Well, which is it folks?

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