02/24/10 Baltimore, Maryland – Not all economists are charlatans. At Harvard is Robert J. Barro, who just computed the net costs of the government’s 2009 stimulus program. It was originally expected to cost $787 billion and is now estimated to come in with a final price tag of $862 billion.
What do you get for that kind of money? Well, Mr. Barro calculates that each dollar of public stimulus spending costs the economy $1.50 in foregone private spending. A “bad deal,” he says.
His work involves a purely macro-economic look at the subject. He believes government spending is subject to a “multiplier” which reduces or enlarges its effects. In the first couple of years, he assumes, the net effect is positive…since the government is spending money without raising taxes to pay for it. But then, tax receipts inevitably have to go up to pay the costs of the stimulus. And taxes are subject to their own multiplier. Take out a dollar in taxes and the economy shrinks by more than a dollar! Which makes the whole transaction, not only a waste of time and money…it makes the whole society poorer.
‘There’s no such thing as a free lunch,’ even in fiscal stimulus, says Mr. Barro. The bill for the stimulus spending must be paid. Taxes must be increased. And when you’ve done the math all the way to the end of the transaction, you find that you’ve lost money.
But Mr. Barro is has a much more generous spirit than we do. He offers no judgment on the character of the government spending as opposed to the private spending it replaced. Like all modern economists, he assumes that a dollar is a dollar…and a dollar spent by government is more or less as good as a dollar spent by the private sector.
But a dollar spent by the government is nothing like a dollar spent by the private sector. A fellow might spend his own dollar unwisely. But at least he gets what he deserves. When the government spends a dollar it does worse than waste the money…it perverts the entire economy and creates zombies and parasites.
Here’s an interesting item from The Wall Street Journal… India produces barely half as much rice per hectare as China…3.4 tons per hectare as compared to 6.5 tons in China. Even dirt poor Bangladesh gets a better yield on its rice land – with 3.9 tons per acre of output.
What’s the matter with India’s farmers?
We return to a Daily Reckoning dictum to explain it. Anyone can make a mess of things, but to really cause a catastrophe you need taxpayer support.
Yes, Dear Reader, India’s agricultural sector gives us yet another example of central planning at work. In the ’70s, when India was even more of a socialist country than it is now, the government decided to boost production by giving farmers subsidized fertilizers. This led, as might have been predicted, to the overuse of fertilizers…one of which – urea – severely damaged the soil. Subsidies, bailouts, quantitative easing, fiscal stimulus – all produce perverse effects. In this case, the effects are so perverse that India can no longer feed itself. It’s forced to import a large part of its food. Naturally, food prices are rising – up 19% last year.
But the cost of food itself is only part of the story. There’s also the cost of the subsidies. In 1976, the fertilizer subsidy program cost $640 million. Now the price tag is up to $20 billion.
Both the soil and the budget are getting worn out. As crop yields decline, desperate farmers put on more and more cheap fertilizer. And then, as the food output goes down, the government thinks it has to ‘do something’ to fix the situation. What can it do? Provide more subsidized fertilizers!
Way to go, feds.
Regards,
Bill Bonner,
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Well the stimulus is doing just great in LA. I am seeing signs the size of small houses saying “Project Funded by US Recovery and Reinvestment Act”, and the sign just sits there for months, and there is no visible construction or other “project” activity going on. But, mighty impressive and large signs those are, that’s for sure.
Bill, I see your point, but still, people are not, generally speaking, parasites. Even Adam Smith acknowledged that it is a losing proposition to just let people starve. A farmer has to feed his horse in the winter so it will be available for work next spring. People are a national assett even when they are unemployed. The country has invested in their education, their health, and their aculturation, etc. and that all goes down the drain when they are just tossed aside to sink or swim during hard times. Whatever we invest in their survival (OK, welfare) comes back in the form of commerce. They buy food, clothing, etc. and that money circulates through the economy. What is so hard to understand about that? Entitlements, likewise, are just a part of the social contract we make with people. Society tells young men that if they will go to war and fight for us, we’ll take care of his medical expenses if he is wounded, for example. Surely you can’t believe that is morally or economically wrong.
Bill, as much as I enjoy your essays, I get tired of the things you say that are just plain wrong. If you are so sure you are right, why don’t you post my contradictory responses?
People are not parasites! We have invested a great deal of time and money in them, and it is not economical to just let them sink or swim in bad times. A farmer has to feed his horse through the winter so it will be available for work next spring. This is the short version.
Lets hear what Mr Gibson has to say. An argument always needs a counter point. Though I think Bill is right.
Lets hear what Mr Gibson has to say. An argument always needs a counter point. I think Bill is right though.
Fred Gibson, why don’t you post your own contradictory responses like everyone else does in the comments?
If they are filled with trash language they will probably be blocked automatically by Bill’s computer server though, so make sure the language is clean.
Many people would be interested in seeing you prove Bill wrong. Good luck!
I agree with Fred Gibson. No one is so free to post those rubbish. Whether positive or negative, opinion has to be shared out among readers. That is real democracy.
“People are not parasites!” Thats a good one. Every Species alive on this planet meets the description of a parasite.
“Financial Guru’s” continue to confuse government with business…
Business is business; governments are NOT SUPPOSED TO BE BUSINESSES!!!!!!!! OK?
Let’s get real……..
Surround Wall Street and it’s “deep thinkers” with crime scene tape…’
Period.
For those who are interested in the causes of things there are boat loads of documented material which show big US and transnational corporations are responsible for farmers overdosing (or the using of in the first place) fertilizers. There is a lot of government corruption involved there caused by big companies. So, from my point of view Bill made an argument against the free market when using his indian farmer example.