Free Markets, Free People


Magical Thinking

The progressive base is having conniptions over the failure of President Obama to get his agenda through Congress despite having supermajorities. Now that Obama is making token gestures (however feeble [via:HA]) towards fiscal sanity, they are experiencing political apoplexy:

As noted in quick hits by BDB and rayj, [UPDATE] and by David in a diary that just caused me to push back this diary’s publication time, Obama has now gone off the deep end. After passing a stimulus that most economists (not just liberal ones) said was too small, and that was made even more inadequate by being heavily tilted toward poor-performing tax-cuts, Obama is now intentionally recreating FDR’s mistake of 1937, when he prematurely cut back spending to try to balance the budget, and sent the country into a new recession.

[...]

Specifically: He’s going to announce a spending freeze on domestic programs (but not, of course, on the military) that is “projected to save $250 billion.” The rationale is that he wants to appease folks worried about runaway deficits. Which is just what FDR was worried about in 1937.

This is Bush-style idiocy. There is no other word for it.

The cause of this consternation is magical thinking on the part of the author, Paul Rosenberg.

Here, to remind you, is the chart I put together during the stimulus debate, showing, among other things, the relative ineffectiveness of tax cuts vs. spending in generating jobs, which is the key to getting the nation out of this recession–the only way that we can rationally hope to start bringing down the deficits:

While some tax cuts are much better than the real stinkers, it’s virtually a given that once Obama starts talking about tax cuts, the GOP is going to start demanding that Bush’s tax cuts be made permanent. Not only–as you can see from the chart–are these about the least helpful tax cuts of all, they are also heavily skewed toward helping the rich and the super-rich.

If you look closely at the chart you will be unsurprised to find that government spending is calculated to provide substantially more “bang for the buck” in creating wealth and jobs. That’s unsurprising because this chart is intended to support a progressive prescription for the economy. Of course it will show government as the answer.

Without arguing the statistical or modeling specifics behind the chart, there is one glaring item that reveals how much magical thinking went into its creation. By far the most “stimulating” actions set forth are “Temporary Increase in Food Stamps”(calculated to create 9,803,333 jobs), “Extending Unemployment Insurance” (9,236,667 jobs), and “Increased infrastructure Spending” (9,010,000 jobs). The closest tax-cutting measure, according to this analysis, in job creation is a “Payroll Tax Holiday” which is estimated to create 7,253,333 jobs. Do you see the problem?

How, exactly, do food stamps and unemployment benefits create jobs? Arguably, spending on infrastructure could create construction jobs on a temporary basis, although that hasn’t proven to be the case with the stimulus bill that was passed. But there is simply no logic to the idea that providing government benefits to the poor and unemployed will serve to create jobs, much less 9 to 10 million of them. That’s just magical thinking.

Rosenberg provides this explanation for the employment fairy (from Mark Zandi of Moody’s Economy.com):

Income support

The House stimulus plan includes some $100 billion over two years in income support for those households under significant financial pressure. This includes extra benefits for workers who exhaust their regular 26 weeks of unemployment insurance benefits; expanded food stamp payments; and help meeting COBRA payments for unemployed workers trying to hold onto their health insurance.

Increased income support has been part of the federal response to most recessions, and for good reason: It is the most efficient way to prime the economy’s pump. Simulations of the Moody’s Economy.com macroeconomic model show that every dollar spent on UI benefits generates an estimated $1.63 in near-term GDP.x Boosting food stamp payments by $1 increases GDP by $1.73 (see Table 2). People who receive these benefits are hard pressed and will spend any financial aid they receive very quickly.

Another advantage is that these programs are already operating and can quickly deliver a benefit increase to recipients. The virtue of extending UI benefits goes beyond simply providing aid for the jobless to more broadly shoring up household confidence. Nothing is more psychologically debilitating, even to those still employed, than watching unemployed friends and relatives lose their sources of support.xi Increasing food stamp benefits has the added virtue of helping people ineligible for UI such as part-time workers.

Whatever the virtues of income support, and even if that support will be quickly spent in the economy, there is no justification for concluding that it will expand the economy. At best, it can stabilize a downturn by maintaining some level of consumer spending. But that does not expand the economy in any way, shape or form, and it certainly doesn’t create jobs an unprecedented level as suggested by Rosenberg.

Indeed, in order to give money to the poor and jobless, the government has to take money fr0m someplace else. Since it doesn’t create anything, the government will either (i) tax those who are working and creating wealth at higher rates, (ii) borrow money, or (iii) print money. Again, these are not wealth producing actions, but instead wealth destroying ones. It is true that, assuming such income support shortens a downturn, tax receipts will eventually outpace the costs of funding those supports. What is not true is that the government benefits will create jobs.

On the one hand, of course, I don’t want to discourage the left from turning on Obama (enemy of my enemy and all that). It just pains me to see it done based on such absurd premises.

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22 Responses to Magical Thinking

  • For whatever reason, I can’t seem to post a link to the Rosenberg post in my post above.  Until I figure it out, you can visit here.

  • “Increased income support has been part of the federal response to most recessions, and for good reason: It is the most efficient way to prime the economy’s pump. Simulations of the Moody’s Economy.com macroeconomic model show that every dollar spent on UI benefits generates an estimated $1.63 in near-term GDP.x Boosting food stamp payments by $1 increases GDP by $1.73 (see Table 2). People who receive these benefits are hard pressed and will spend any financial aid they receive very quickly.”
    Wait wait wait wait – so…am I wrong if I interpret this to read that government investing in Unemployment benefits at a dollar, will yield a $1.63 in GDP?  SHIT!  isn’t that a 63% return on my investment?  Am I reading that wrong?  and even BETTER if I invest in food stamps!   Good Lord!  The answer is obvious!  Put the ENTIRE Federal budget into FOOD STAMPS!   We’re getting a 73% return on dollars invested !  It’s a miracle, we can wipe out the deficit and boost the economy all at once!  (Who says I couldn’t work for this administration….I think my cockeyed misinterpretation is as valid as some of the ones I’ve heard in the last year…)

  • It is amazing to me that among the left there has arisen in the last 25 years a zeitgeist that says, all spending is good, and all tax cuts are bad, and if we could just spend everything we have and tax at 100% then we would be prosperous!
    It is amazing because it is demonstrably the exact opposite of reality.  Low taxes, particularly low marginal rates, and a government that does not run a deficit is the absolute best way to (1) cause an economy to grow.  (2) give opportunities to the poor, and (3) increase the overall wealth of the citizens.
    This is not even debatable,  every single nation that has started spending more than they have and increasing taxes to try and catch up has ended up with anemic or negative growth rates and high unemployment, wage stratification, and all the evils that go along with those things.
    Every time.

  • So welfare creates jobs, which decreases the need for welfare.  Wait, it’s self-defeating!

  • Apparently, it’s not just climate researchers who rig their models to produce a desired result.

  • There was ..
    $116.2 billion for the $400 payroll tax credit for workers earning up to $75,000; married couples filing jointly get $800 for income up to $150,000
    $90 billion for Federal aid to states for Medicaid spending
    $69.75 billion for Middle-income taxpayers get an exemption from the alternative minimum tax of $46,700 for an individual and $70,950 for a married couple
    $40.6 billion for Aid to states to balance education budgets, prevent cutbacks and modernize schools
    $29.9 billion for Grants for highway improvements
    $26.96 billion for Extension of jobless benefits for up to 33 weeks
    $24.75 billion for 65% subsidy for laid-off workers to continue paying premiums for former employer’s health plan for nine months
    $17.5 billion for Incentive payments to hospitals and physicians who computerize medical-records systems
    $14.83 billion for Increased eligibility for refundable child tax credit, with all income over $3000 qualifying
    $14.2 billion for One-time payment (bribe) of $250 for retirees, disabled people, SSI recipients, railroad retirees and disabled veterans
    … and many others of lesser value (and some education ones that were larger).
    Granted that all of these are “helping people,” except for the highway money and the “pie-in-the-sky” numbers that education will always help (hey, it is “for the children”), it could be argued that none of these will generate meaningful lasting jobs.

    • Come to think of it, the “stimulus” isn’t structure to “stimulate” but rather to “sustain”

  • House Democratic leaders said a report by the Congressional Budget Office (CBO) showing a $1.35 trillion deficit in 2010 was the result of policies put in place by President George W. Bush and Republicans in Congress, who controlled the House and Senate until the 2006 elections.

    This is stretch. 3 years later and the Democrats still don’t know how to run Congress.

    • Well, they have to blame SOMEBODY…

    • Simply unbelievable.  The Democrats will go down in flames in 2010 and probably 2012, all the while insisting that it isn’t their fault.  How tone deaf can they possibly be?

  • Assuming that the numbers cited by Rosenberg are accurate, they do seem to indicate that spending money on welfare, food stamps, etc. ARE effective in creating jobs.  Now, I agree with others here that robbing Peter to give to Paul doesn’t generate long-term wealth, but what accounts for the numbers Rosenberg presents?  Is it that the government is usually behind the curve and generally starts expanding welfare / unemployment AFTER a recovery has started?  Or that tax cuts take time to work, and he is deliberately skewing his time frame so that their effects are not included? 

    I ask because, on their face, his numbers are persuasive and there needs to be a better rebuttal than citing “common sense” (something libs absolutely do not possess).

    Anyway, how does one determine HOW a job is created?  When I was hired for my present job after being unemployed for a short time, was it because the government spent $X on my unemployment?  Or because it cut $Y from somebody else’s taxes?

    • Why should I believe the numbers at all?  Either one of us can come up with a spreadsheet that shows numbers doing what we want them to do.
      Without some indication of where they GOT their numbers there’s no credible reason for me to believe that money spent on Food Stamps necessarily equals efficient JOB CREATION on a macro level.  You’re going to have to go through a very tortuous proving path to demonstrate that, though at some level of spending we can assume it IS true.  But we do NOT have to assume it is and efficient producer of jobs.  Logically the  best case is that Food Stamps increase yields an increase in spending which causes higher volumes (more purchase of product, causes more food stamp driven consumer demand for product, causes more orders for product, causes more creation and delivery of product for purchase and so on) along with the by product that perishable purchases they’d been using their cash for, now free the available cash for purchase of non perishable consumer goods like television sets, books, magazines, shoes, etc which (are not supposed to be) cannot be purchased with food stamps.
      Why should I believe that the return is going to be anything like 1.73 on a dollar spent, because his chart says so?   When they’re playing with numbers that large there is no way it’s anything but a forecast and at some point the extrapolation of what will happen breaks down due to the rules of diminishing returns.    Looks wonderful on paper, but never holds up in reality.

      • Furthermore – if the argument is there is more money available in the general pool for consumer spending a a result of food stamps, does it REALLY make more sense that money coming from the government, which was gotten by taking it AWAY from the consumers, can be better utilized through the government and NOT through the very people you’re using to stimulate the economy with ‘government’ money (food stamps).  If the government didn’t take it AWAY from them in the first place, they’d have it to spend.  The only jobs you’re creating for certain are GOVERNMENT jobs to administer the systems of collecting the cash, turning it into food stamps, and handing it back out to the people you took it away from (while creating a government handout dependent class of society).
        This is insane, it once more assumes, as most progressive schemes do, that wealth actually  derives from government.  I could understand if there was a ‘product’ here that Government sold, like Unobtanium, but it has no product, other than it’s own perpetuation and enlargement.

      • I absolutely agree with you that it doesn’t make logical sense.  However, it seems to me that the question is how to rebut the left when they point to these sorts of numbers and sneer that spending is CLEARLY more effective than tax cuts at creating jobs?  I’ve heard Jean-Francois say that and thought, “What an idiot” (which he is), but there seems to be some evidence that he can use to defend that position.

        So, which is it:

        (A) Rosenberg’s numbers are outright fabrications;

        (B) He has jiggered time scales and other factors to inflate the impact of spending and reduce the apparent impact of tax cuts on job creation;

        (C) His premise is false in some other way, i.e. he is omitting other factors that do more to explain the apparent results than his simplistic model.

        In effect, it’s another case like “global warming”: the left has numbers and other “evidence” that appear to support their case, but we know now that the evidence was greatly exaggerated, cherry-picked, or outright falsified.  What is Rosenberg doing in this case?

    • I ask because, on their face, his numbers are persuasive and there needs to be a better rebuttal than citing “common sense” (something libs absolutely do not possess).
      People must be consistently reminded that the world is round.
      And blanket false statements like “the government doesn’t create anything” doesn’t serve useful when convincing folks of the value of the private sector over a public one.   Governments throughout eternity have and will continue to do so – create jobs, technology, investment, ect.  It’s just not  very efficient at it.  It is not the genesis that the free market is.

      Cheers.

      • I stand corrected Pogue, governments CAN create everything you mentioned and generally  as you said, they are just not very efficient at it.  I’ll amend my comments to that effect in the future.  Again, as you point out, my incorrect statement to the effect that they create nothing is actually hardly better (on reflection) than Rosenberg’s statement that all good flows from their increased spending.
        Cheers

  • The solution to the economic slump is so obvious! Fire EVERYBODY and put them on unemployment and food stamps! The economy will grow and all those folks can go back to school to learn new skills for the fast-paced, challenging, high paying jobs of the future. From which hey can again be fired, thus stimulating the economy even further! The cycle can be repeated indefinitely, until we have created a worker’s paradise.
    I, too , have a chart which supports my theories.

    In the real world, jobs are not created until someone wants to hire an employee. It’s a demand thing, not a supply thing. And nobody is going to want to hire new employees until things stabilize and employers see their sales at least level, with the likelihood of an increase. All this turbulence just delays a recovery.

  • The ONLY way food stamp and welfare spending can cause growth is if the recipient was not eating or otherwise spending money before they received the benefits. Not very likely, except in the case of illegal immigrants. Perhaps that is why folks say illegal immigration stimulates economic growth.

    • Part of the problem with the premise of increased food stamps distribution, for example, is the unrealistic idea that there is an unlimited demand for the items that food stamps purchase.  If I give a man $30,000 in food stamps for a week, he is eventually going to buy all the things he needs, or thinks he needs, in triplicate, before he runs out of room to store those blocks of cheese and sacks of rice.   He’ll get to the point where he’ll have what he considers ‘surplus’ food stamps and he won’t spend them (we’re pretending for the moment there won’t be a black market food stamps for cash outlet for his surplus, and that he is limited to certain items which he may purchase with the stamps).