Are You Stimulated Yet? Posted by: Dale Franks
on Wednesday, January 28, 2009
So,President Obama's stimulus bill has now passed the House on a party-line vote (Good!) in which the only people to cross the aisle were 11 Democrats, to vote against it. So, it's on to the Senate where we can probably expect the wonderfulness of bipartisanship to, again, fail to appear.
Pres. Obama wanted strong bipartisan support, they say. If so, then when being counseled about what should be in the bill by Republican House honcho John Boehner, he probably shouldn't have turned a dead-eyed stare at Rep. Boehner, and wised off with, "I won."
That's right. You won. And now, you own the stimulus package.
Good luck with that.
Because, as most clear-thinking people realize, the stimulus bill won't stimulate much. The last time we tried this, in the 1930s, we managed to reduce the nation's unemployment rate to...17%.
Huzzah.
Fortunately for FDR, he had an agent waiting in the wings to rescue the economy from the Great Depression: Nazis. I mean, if you want to reduce unemployment, it's helpful to be able to put 12 million people in uniform.
Obama doesn't have any Nazis handy.
On the bright side, we will now have a fascinating experiment to see if Lord Keynes' original ideas have any merit. And you, my friends, get to be the test subjects.
Looking over the bill, I'm not sanguine about the results. mainly, that's because since Keynes' first came out with "The General Theory" in 1936, we've had 80 years of experience with how it actually works, and the original ideas of Lord Keynes have had to undergo a restructuring in light of that experience, and to account for the Monetarist and Austrian criticisms to which it was subjected.
Out of that experience rose the Neo-Keynesian School, which I basically subscribe to, in that I beleive that:
1) Macroeconomics arises from microeconomic foundations. 2) Information is, in many cases, asymmetrical, which rules out perfect competition. 3) Monetary policy should aim at macroeconomic stabilization, and not to produce short-term economic gains (at the price of increased inflationary expectations).
I suppose I should also note that I am a Neo-Keynesian only because we have a fiat currency. If we didn't...well, that would be another story.
In any event, Keynesianism was, I thought, killed in the 1970s by stagflation, just as the original ideas of Monetarism were killed in the 1980s and 1990s by the decoupling of inflation and the money supply.
We will now have a fascinating experiment to see if Lord Keynes' original ideas have any merit. And you, my friends, get to be the test subjects.Neo-Keynesianism is basically an attempt to sythesize what we know works from the original ideas of Keynes, Classical economics, and the Monetarist ideas of Milton Friedman.
What we are trying to do now, though, is a return to the original Keynesianism, that I thought pretty much everyone had agreed was basically unworkable in the real world. Even Paul Krugman seems now to have rejected his own academic work, which was broadly Neo-Keynesian, and abandoned his academic arguments that government intervention, even in cases of market failure, was more harmful than helpful.
As far as the stimulus bill goes, it appears "we are all Keynesians now".
We should know better.
Increasingly, it looks as if the Austrians were mainly right in their criticisms of a fiat currency—the regular economic shocks and deflations of the 19th century under the gold standard notwithstanding.
Unfortunately, going back on the gold standard may not be all that practical at this point.
Although it can be done, it might be a painful process. In 1926, when Winston Churchill was Chancellor of the Exchequer, the British government returned to the gold standard, after abandoning in the emergency of World War I. It resulted in massive deflation, and lots of unpleasant economic hardship.
I suspect the main problem with that move was that they tied the pound to the pre-war standard of £4.83 per ounce, rather than taking into account the inflationary effects of the war-era spending, but it still gives one pause.
And, there is one other thing that gives one pause, as well, which is the economic record of boom and bust cycles during the 19th century, when we were on the gold standard.
Once you return to the gold standard, the money supply becomes relatively inflexible. The amount of money you have depends upon the amount of gold you have, and it is next to impossible to match the money supply with the demand for money over the short term.
But if the stimulus bill fails spectacularly, I expect the gold bugs will come crawling out of the woodwork.
Do you mean "full reserve backing" and not the "gold standard".
I thought the gold standard was a sort of a proxy international currency that was traded back and forth at a rate fixed to each participating country’s currency. Basically the participating nations had fixed currencies relative to each other and when an exchange was made, ownership of gold changed hands. This amount of gold was only the amount needed to conduct these exchanged and did not back all dollars in any nation.
Yes, it would have to be some sort of very limited specie standard as you could not go back to a full gold standard in a modern economy. It just would not work.
I predict massive inflation starting appx. eighteen months after the adoption of the slush fund, er... stimulus package. That is about how long it takes to work it’s way through the system.
This inflation will drive commodity and energy prices up again and will kill any nascent recovery. This is my prediction. The Obama team are like spoiled silly children, they have not a clue what they are doing, and the Democrats in congress are worse.
I have never before seen so many people willing to drive the train into the ditch.
Do you mean "full reserve backing" and not the "gold standard".
Well, I didn’t mean to get that far down in the weeds.
But as a practical matter, they result in the same end, in that you can’t enforce a specific value on a gold standard in international trade, if you run an inflationary fiat currency domestically.
So it doesn’t matter if you have full reserve backing or not—although we did in the 19th century, when all paper notes were silver or gold certificates, not simple banknotes.
At the end of the day, if you monkey with the value of the currency internally, you can’t adhere to the international trade gold standard, because you can’t afford the drain on your gold reserve that is caused by repatriation of gold for your inflationary domestic dollars. And, of course, it’ll strangle all of your export trade, since it raises the prices of exported goods.
Either way, you end up with a fairly inflexible money supply, and your ability to inflate or deflate is determined by the size of your gold reserves.
Unless, of course, there is no international trade.
"if you want to reduce unemployment, it’s helpful to be able to put 12 million people in uniform"
If you believe that putting 12 million people helps stimulate the economy, how is random other stimulus different? The purpose of the military is to blow the enemies’ things up. (Ok, their purpose in WWII was that, now they do lots of other things, for better or worse.)
From a pure economic growth/investment standpoint (not national security, etc), how is that different from putting 12 million people to work digging holes and filling them in? Nothing is produced that is particularly useful after the war. The research that scientists did could be (and was) useful longer term, but the vast majority of employed soldiers did not "produce" anything of longer term use, had the Axis not attacked. Even so, the results from the research would be an argument for government funded science in peacetime as well.
Having a strong military is most certainly a necessity, but economically it is an overhead, not an investment. The "product" of soldiers is a dead enemies and blown up stuff... not exactly long term investment material. (Though again, absolutely necessary at times.) If the stimulation from WWII and government spending was paying for war production, which allowed individual companies to invest in assembly lines and such... there still is nothing that makes "war-time government created demand driving investment" different from "peace-time government created demand driving investment". Really, in any sense I can’t find a meaningful distinction. (Ideas?)
I’m not really happy with this conclusion... but the reasoning seems to point in that direction. I can’t see why "government demand for tanks stimulates" but "government demand for widgets does not stimulate". If WWII helped... then peace time stimulus can help. At that point the debate generates into details on where the stimulus money should go.
If you believe that putting 12 million people helps stimulate the economy, how is random other stimulus different?
I didn’t say it stimulated the economy. I said it reduced unemployment.
But, of course, if you’re willing to throw 90% of the country’s output into military spending, it will, in fact, stimulate the economy...until you run out of credit to keep doing it.
Unless, of course, you engage in a worldwide war, at the end of which, you have the world’s only remaining intact industrial infrastructure, which allows you to absorb the demobilized soldiers into private industry to produce goods and services for the rest of the world.
You can do a lot of things in wartime that people won’t stand for in peacetime. Confiscatory tax rates, rationing, etc. People will adapt pretty well to fighting an existential struggle against bad guys in another country.
They tend not to accept those things in peacetime. Hence the failure of the New Deal during the 30’s, and the success of WWII in massively increasing output and employment.
I can’t see why "government demand for tanks stimulates" but "government demand for widgets does not stimulate".
Because people are willing to put up with quite a lot, and do without quite a lot when they feel the existence of the nation is endangered by an outside threat. That psychology does not obtain at other times.
One other thing about WW2. It seems to me FDR chjanged his focus from the economy to the war, allowing the market additional freedom. Obviously there were exceptions driven by the war effort (gas rationing, for example), but anything that distracted FDR from tinkering with the economy was a good thing.
Another thing is that all the war production was not exactly the same as digging and filling holes. As an example, I have a nice M-1 rifle obtained from the DCM that was made late ’42.
If the .gov wasn’t so damn a*al, imagine the value of some of the WW2 production. I’d love to have a Thompson SMG, and an M1917 watercooled MG would go great in my living room (but it would be too expensive to shoot more than a few rounds through).
Because people are willing to put up with quite a lot, and do without quite a lot when they feel the existence of the nation is endangered by an outside threat.
Which is why Ahmawhackjob and Hugo Cheesewhiz both need the US to continue to exist. Though Iran can get mileage out of Israel too.
I beg to differ. Whether he’ll take those Nazis as seriously as FDR took the original ones is, of course, a whole ’nother issue.
Precisely the point I made the last time this line of thought came up. And he’ll wait until they make a move so that even his left will call it a crisis... at which point the Rahm Emanuel rule comes into play.
