Free Markets, Free People


Basic economic ignorance

If ever there was an indicator – an example – of the appalling level of economic ignorance to be found among our national legislators, this from Nancy Pelosi is perfect:

Talking to reporters, the House speaker was defending a jobless benefits extension against those who say it gives recipients little incentive to work. By her reasoning, those checks are helping give somebody a job. "It injects demand into the economy," Pelosi said, arguing that when families have money to spend it keeps the economy churning. "It creates jobs faster than almost any other initiative you can name."

Pelosi said the aid has the "double benefit" of helping those who lost their jobs and acting as a "job creator" on the side.

Demand is not created or "injected" by jobless benefits. At best may be, at some level, maintained. But it also could be argued that if the drop in income in an area is wide enough (former salary income v. jobless benefit income) it could cost jobs.

For instance the store clerk in a grocery store can be economically justified if the average grocery bill in the area is X. But if it falls to Y, which is likely with belt tightening by those receiving lesser unemployment benefits, then the clerk’s salary is no longer economically justifiable.

Jobless benefits rarely lend themselves to purchases outside the necessities because they’re usually not a great amount of money. The benefits are a maintenance income. What they mostly do is allow the recipient to pay for food, clothing, shelter and transportation, or some combination of those necessities.

Employers don’t create businesses and jobs in anticipation of receiving some of a person’s unemployment check. So unemployment checks are not out there creating jobs "faster than almost any other initiative you can name". In fact, their extension most likely inhibits job seeking (as the person and/or family adjust their lifestyle to the income until all necessities are covered).

This is an amazing example of the appalling economic ignorance that has gotten this country in the financial hole it is in and seems bound and determined to dig it deeper. And she’s 3 heartbeats away, folks.

~McQ

[MICHAEL ADDS:] The left has been pushing this idea for awhile. I tackled it back in January:

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.

And again in February. Based on whatever studies they’ve compiled to prove their point, the Democrats are going to simply go with this economic model sans examination.

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33 Responses to Basic economic ignorance

  • In the net, there is no way that the payment of jobless benefits can increase overall demand for goods and services.  The money to pay for the benefit has to come from somewhere.  It can either come from our pockets today, in which case our own demand for goods and services decreases.  Or, it can come from the pockets of our children and grandchildren, in which case they must pay it back in both principal and interest, lowering the demand for goods and services tomorrow.  Or the money can come newly minted from the government printing press, in which case the cost of all goods and services inflates, causing us to buy less of everything.

    In addition to all that, when a dollar is extracted from our pockets for an unemployment benefit, the full dollar doesn’t reach the beneficiary.  I suspect that only 75 cents does, with the other 25 cents lost in bureaucratic overhead.

    Nancy and her buddies are engaging in fantasy.  Not that that’s unusual.  They’ve always been very comfortable in that world.

    —Tom Nally

    • “I suspect that only 75 cents does, with the other 25 cents lost in bureaucratic overhead.”
      Tom, I think you are being overly generous in the percentage that actually gets to people after the government takes its share.  I would reverse the percentages.
      In any event, there is a level of stupidity that you simply cannot reason with.  Pelosi is at that level.

    • There is no net change in DEMAND, and the money goes from one earners pocket to another non-earners pocket. If it is funded by printing money, it only creates inflation. If by borrowing, it crowds out investment.
      In sum, it’s just cannon-fodder for politicians in their quest for life-long tenure.

  • They do nothing at all. The money has to come from somewhere, either from taxes or inflation. It is just more of the ponzi scheme favored by lefties.

  • I’d like to put Pelosi on those benefits for a month and see how much “demand” she generated.

  • And she’s 3 heartbeats away, folks.

    That is pretty frightening, until one considers the current line of succession.

  •  And she’s 3 heartbeats away, folks

    >>>> From a thunderclap coronary we hope.

    Plus, disconnect alert!!!!
    “Pelosi said, arguing that when families have money to spend it keeps the economy churning”

    >>>> Then that’s a GREAT reason for lowered taxes, right? RIGHT???

    • Well, right Shark – but the money needs to come from government, not from lowered taxes you know.  Government money comes from a magic fountain in the basement of the Treasury building in Washington.   The taxes you’re talking about are only there to punish rich folks for their richness and make them more like the rest of us, and the President told us that no one’s taxes would go up 1 dime as a result of his government.

      • But ALSO remember the fiction that a tax cut is actually a COST to government.  Hence, our baronial class justifies THEIR spending as no different than “SPENDING” via a tax cut.  And ALWAYS remember the Clintonian declaration that he just could not be sure people would spend their own money correctly.

        • While back one of the pinhead class arrived and told us how grateful we should be that our taxes were as low as they were in the US, and how generous the government was being in allowing us to keep so much of our income.

          • Consistent with the Collective’s notion that we belong to government, and not viser verser, as Archie Bunker would say.

          • Just demonstrates they are in sync with the politicians – government for the sake of government.

             

        • “our baronial class justifies THEIR spending…”

          First of all, it isn’t spending, it’s *investing*–you know, for the children and all that.
          Secondly, this investment is done by professionals with letters after their name and credentials and stuff, not ignorant ideological boobs like you and me who would spend it on the wrong things.
           

          • “who would spend it on the wrong things.: – yeah, like our families, our businesses, ourselves.

            Geeze, it’s so obvious we shouldn’t be given that kind of monetary control!

  • “It injects demand into the economy,” Pelosi said, arguing that when families have money to spend it keeps the economy churning. “It creates jobs faster than almost any other initiative you can name.”

    Well, in SanFran Nan’s defense, unemployment checks probably DO create jobs faster than any other program she, Dingy Harry, and The Dear Golfer have devised.  And passing out cash willy-nilly to stimulate the economy is right in line with the economic policies of that enlightened genius, “Helicopter Ben” Bernake.

    Incidentally, can somebody explain how in the world jobless claims can increase but the overall rate goes down???

    • Incidentally, can somebody explain how in the world jobless claims can increase but the overall rate goes down???

      By the fact that more and more people are giving up looking for work so are no longer OFFICIALLY unemployed. I’ve heard numbers from 16% up to 24%.
      That doesn’t include the millions that have been cut from full time to part time – they ARE EMPLOYED, ya’ know.

    • Yup – a growing number of people are dropping out of the job market by no longer seeking work. So that brings the number of “unemployed” down. It’s a BS number anyway – it doesn’t truly reflect unemployment. I believe the U6 number (I think that’s what it is called) is a closer representation of the truth.

  • 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.

    This is the unicorn school of Keynesian economics.  It teaches that $1.00 in government spending will result in $1.00 + X in economic activity.  That is easily shown to be nuts.  Were it true, we would always be justified in spending everything we could tax, borrow or print, even in boom times.

    As some here have noted, there are at least two inefficiencies involved in ANY government spending program putatively intended to stimulate the economy: 1) government cannot take $1.00 by taxing it, then spending, without filtering out some portion of that value via its bureaucratic costs, and 2) by taking $1.00 out of the market-based economy (which tends to allocate resources rationally, expanding economic activity), government puts it into a system where it will be spent in ways that are often counter-productive (actually shrinking economic activity via waste).

    There is also the economic law which says that when you subsidize ANYTHING, you will get a surplus of that thing.  It works very reliably.  When you subsidize unemployment, you get…

    I always recommend Dr. Sowell’s excellent book to my family, friends, and associates…Basic Economics.  Hard to beat.

    • According to genius Erb, the only means of regulating a market is via government.

      • Actually, that is the patented method for screwing markets up.  For various structural reasons, regulation…especially beyond very basic regulation…CANNOT work to do what it pretends to do, but WILL work to grossly distort the market regulated.  It also serves to delude people into thinking they are protected, causing them to be much less careful and informed than they should be.

        As someone who toils in the trenches of our civil justice system, I can tell you that it serves as a very powerful means of regulating the conduct of market players.  That is why it evolved, and is a market response itself (although that is a rare view…even among conservative/libertarian thinkers).

        • No one with an ounce of understanding needs a more clear cut current example of government regulation, and regulation legislation  ‘to be’, having an effect on the market than the current ‘recovery’ we’re in.

        • There is a long, clear, and sorry history of market distortions from regulation causing IMMENSE damage to our economy.  The recent…and current…contraction is the EFFECT that leaning on financial institutions to make loans that they would never make in an unfettered market CAUSED.

          It should always be remembered that health care costs BEGAN to be distorted by controls imposed back in WWII by the FDR administration, and only were MORE distorted over time by other Federal intervention in the market.

          That barely touches the history.

    • As another matter – Erb’s fundamental view is business is ‘corrupt’ and will ALWAYS attempt to screw the consumer, regardless of the product (commodities to condoms to condominiums) involved.   Every time he insists government must be present to protect the consumer he summons up the ‘mafia like corruption’ theme.

      A twisted world view to assume that a corrupt profit motive is always the primary controlling and driving force behind every business venture, and instructive of his views in general.   He’s a believer in the infamous ‘them’ that one never meets who are the sources and destinations for corruption, without ever considering that he’s relying on the ‘them’ in government to protect him from the ‘them’ in business.

      • Walter Williams, among others, has noted the simple truth that in capitalism, you only succeed by making consumers happy.

        Of course, as Adam Smith observed, incumbent players in the “merchant class” would always seek a monopoly…or quasi-monopoly…position in a market.  But, as Smith knew back then, that position can only be maintained in a market economy with the collusion of government.  What so many forget is that business is ALMOST ALWAYS the prime mover behind regulation, as business act in concert with Smith’s observations  over two centuries ago.  It seems like a paradox, but is totally consistent.

    • There is also the economic law which says that when you subsidize ANYTHING, you will get a surplus of that thing.  It works very reliably.  When you subsidize unemployment, you get…

      That’s appropriate in a normal job market where jobs are AVAILABLE. If, there’s noting available the point is worthless. I don’t know about other states, but our state limit is $450 a week (up from $233 a week just two years ago) but that’s chicken feed to someone who was making $1000 or more a week and still has to maintain a budget. That’d be a damn expensive “paid” vacation.


      • I understand your point, but you miss mine.  $450 a week is still a damn site more than $0.  You also assume the a great fraction of unemployed people (at least in the stats) are  high earners.  That is without support.  $450 for sitting on your 2-spot is PLUSH for a lot of people (some of whom are out working off the books).

        • “$450 for sitting on your 2-spot is PLUSH for a lot of people”

          $450 is the upper limit. Payments are  based on your income. Here in Maryland the payments go from $25/wk to a maximum of $410/wk.
          If  $450/wk is plush for someone, I guarantee that someone was not making nearly that much while working. Going on unemployment means as substantial reduction in income and a radical lifestyle change. $410/wk=$1640/month=$21,320/year. That’s the maximum.  That may be plush where you come from, but not it doesn’t even cover the mortgage payments . 

  • I’d like to roll scaffolds the size of those giant siege engines from one of the Lord of the Rings movies right out in front of the Capitol.

  • The stock markets are sending their very clear verdict on Obamanomics…it ain’t pretty.

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