Thursday, 15 September 2011
The Wall Street Journal’s daft anti-stimulus arguments.
One argument put by this WSJ article against stimulus is that stimulus money is often wasted. That is true, but the reason for this waste is easily dealt with, at least in principle.
This reason for the waste that often accompanies stimulus is that as soon as politicians and others get wind that extra money is available, a large assortment of cranks come out of the woodwork to push their own pet forms of spending, whether it’s Japanese style bridges to nowhere, or plain old fashioned pork.
But this failing does not prove that stimulus as such is wrong. The waste derives from letting people – politicians in particular – take economic decisions they are not used to taking. Put another way, where stimulus is in order, we should just expand the money available to EVERY entity and organisation which spends money.
For example as regards private sector spending, the main source of such spending is the CONSUMER. So part of any stimulus package needs to consist of feeding extra spending power into the pockets of ordinary households. That’s why advocates of Modern Monetary Theory have long advocated a payroll tax reduction.
That’s all very boring and does not attract attention to ego-centric politicians in the world’s capital cities. Plus the millionaires and billionaires who make up the elite can’t bear to see ordinary people have more spending power. However, the basic purpose of economic activity is to produce what PEOPLE or CONSUMERS want – not what makes politicians or the elite look good.
The public sector.
As distinct from expanding private sector spending, stimulus packages normally expand the public sector as well. And part of that will normally include, for example, having local / municipal / US state governments spend more. Fine. Give those local governments more cash and let them get on with it.
But to a significant extent, this is NOT what has happened in the current recession. What HAS happened is that thousands of bog standard productive jobs have been destroyed: fire-fighters, police, librarians and so on. And in their place we have a variety of farcical bridges to nowhere jobs to which the WSJ rightly objects.
And even LOCAL politicians should not have too much of a say in how the money is spent. They should allocate the extra cash to local police forces, local education authorities, etc and let the latter get on with it. Who knows how best to spend extra money in a particular school: the head teacher or a politician in some distant city?
Stimulus money has to be “repaid”?
The WSJ article then claims that “A dollar that eventually will be taken out of the private economy through borrowing or higher taxes to fund pointlessly expensive projects . . . .is not the way to nurture a recovery.”
The WSJ obviously doesn’t get the difference between macro and micro economics, because the above sentence applies profit and loss account principles (micro economics) to government and the economy as a whole (macro).
The first flaw in the above “eventually taken out” idea is that today’s deficit money JUST ISN’T necessarily “taken out” in years to come. Deficits accumulate as extra monetary base and/or extra national debt. Just look at the monetary base figures over the last few decades. Taking some figures from the latter source, the US base was $50bn in Jan 1960 and $600bn in Jan 2000. Children with a basic grasp of maths know that 600 is a bigger number than 50, though whether the WSJ has worked this out, I’m not sure.
And even where stimulus money IS EVENTUALLY “taken out” of the private sector, this has nothing to do with any waste or lack of waste.
The waste arises from the initial mis-allocation of resources, e.g. building bridges to nowhere. And that is the end of the waste, at least as far as the mis-allocation of capital expenditure goes.
Taking dollars out of the private sector simply involves changing numbers in computers: e.g. subtracting from household accounts and adding to government accounts. And the latter is a good idea if demand and inflation look like getting excessive. But if demand and inflation are well under control there is no point in removing these “numbers” from private sector accounts.
Put another way, the WSJ obviously thinks that “taking a dollar out of the private economy” involves removing REAL RESOURCES from the private economy. It doesn’t. Reason is that, as pointed out above, it only makes sense to “take dollars out” if inflation looks like getting excessive. That is, the purpose of “taking dollars out” is NOT to reduce the private sector’s consumption or turnover in REAL TERMS: the purpose is, or should be, to ensure that demand in money terms is not so excessive as to cause excess inflation.