Saturday, December 27, 2008

Economic nonsense

When he finally takes office, look for a big old bailout from Barry:

At least as designed, the Obama plan, like a calibrated drug regimen, aims to deliver both short- and long-term relief.

The short-term help would flow partly from tax cuts of $1,000 for couples and $500 for individuals,costing about $140 billion over 2009-2010. The Obama team, said two congressional Democratic aides familiar with the discussions, will likely deliver those tax cuts by reducing the tax withheld from paychecks.

This would put more money in paychecks, unlike the lump-sum rebates issued earlier this year. Many people used those to pay down debt, rather than spending them as the administration had hoped.

In addition, states would get up to $200 billion over two years for Medicaid health coverage for the poor and to narrow state budget gaps, which are forcing layoffs and cuts in services. The aides spoke on the condition of anonymity to candidly discuss the evolving plan.

Throwing money at the problem to solve it. That'll work.

It's frustrating to see that the "do something" crowd is given the benefit of the doubt, no matter how silly their plan. The correct response by the government during an economic crisis is to do nothing, or perhaps cut taxes and reduce spending. This is precisely the thing government is least likely to do.

When the bailouts and the stimulus checks fail to stimulate the economy, the powers that be will be excused on the grounds that they couldn't sit idly by while the economy was in crisis. And they will be forgiven, even though government action causes and exacerbates the very crisis they were ostensibly attempting to eradicate.

You won't read this in the article, of course. Our supposedly skeptical journalists are either too ignorant of economics or just too wrapped up in their belief that the government will save the day to doubt the efficacy of stimulus and bailouts. This is to be expected. But the article contains a line so preposterous that we must be amazed that no eyebrows were raised when such an incredulity was printed:

For each $1 invested in infrastructure spending, about $1.60 in economic activity would be generated, according to estimates by some economists.

If I told you that I knew a way for you to make sixty percent returns on your investment, you would wonder whether I was smoking crack or if I had merely stumbled upon a Ponzi scheme. With the help of some funny math, the stock market promises returns of ten percent, but anything approaching sixty percent is unheard of. And yet, there it is, smack dab in the middle of the article, without the accompaniment of a hysterical laugh, even a parenthetical one.

If infrastructure spending really made such stupendous returns, we would be wise to invest all of our spending in infrastructure, economic crisis or no. Why, if we simply devoted all of our money to infrastructure, we could grow the GDP by sixty percent.

The reality is these numbers are completely inaccurate. Every dollar invested in infrastructure must come from somewhere. These dollars are taken from the private sector; ignoring the inefficiencies of government bureaucracies, the net result is, at best, a replacement of private sector employees with those who work for the government. And this overly optimistic view depends on the infrastructure being invested productively, and not, say, on bridges to nowhere.

Since the government is far less efficient than the private sector, increasing government spending in the midst of a recession is a profoundly stupid thing to do. Only a return to normalcy in the private sector will end the recession; every attempt to squeeze it only puts off the day on which normalcy shall return.

It'd be nice if journalists expressed some familiarity with this theory. In the meantime, I'll settle for skepticism toward obviously exaggerations.


hoosiertoo said...

Having worked through Rothbard's America's Great Depression and personally experienced the glories of government meddlers in the economy from Nixon (remember wage and price controls?) through Bush II, it's a wonder Keynesians aren't shot on sight.

troutsky said...

Better bring lots of ammo. You two are out in the wilderness, why, not even the free marketeers are spouting such fundamentalism. I think you are equating "economic activity" with "returns on investment".

hoosiertoo said...

There's more than enough ammo. Finding the trigger men is the problem.