No market news. Every market in Christendom was closed for the 25th.
Still, the crackpot theorists and muddled meddlers never seem to take a holiday. Robert Shiller should have been embarrassed to write the following words. The New York Times should have been embarrassed to print them.
But today’s economic intelligentsia knows neither shame nor common sense. You be the judge:
It has long been known that Keynesian economic stimulus does not require deficit spending. Under certain idealized assumptions, a concept known as the “balanced-budget multiplier theorem” states that national income is raised, dollar for dollar, with any increase in government expenditure on goods and services that is matched by a tax increase.
The reasoning is very simple: On average, people’s pretax incomes rise because of the business directly generated by the new government expenditures. If the income increase is equal to the tax increase, people have the same disposable income before and after. So there is no reason for people, taken as a group, to change their economic behavior. But the national income has increased by the amount of government expenditure, and job opportunities have increased in proportion.
Economists embraced this multiplier because it seemed to offer a solution to a looming problem: a possible repeat of the Great Depression after wartime stimulus was withdrawn, and when new rounds of deficit spending might be impossible because of the federal government’s huge, war-induced debt.
It turns out that this worry was unfounded. The Depression did not return after the war. But in the early 1940s, economists justifiably saw the possibility as their biggest concern. Their discussions have been mostly forgotten because they didn’t have much relevance for public policy – until now, that is, when we again have a huge federal debt and a vulnerable economy.
Okay. The feds spend more money and increase taxes to pay for the spending. This has a multiplier of “one” – or so they say – meaning, you get one times the benefit.
Why do we bother to challenge it? The idea is delusional claptrap. No need to shout it down. It whispers “nonsense” to anyone who will listen.
All we have to do is imagine what really happens:
A small, isolated town is in a slump. The mayor has read enough Keynes, Samuelson and Shiller to be dangerous. He increases both spending and taxes. He hires 20 people and raises taxes to pay their salaries. The 20 go to work, say, cutting the grass or painting the town hall. Now, they have income…which they spread among the town’s bars, brothels and banks. Presto! GDP goes up!
But where does the money come from? It comes from the taxpayers. On the one hand, the taxpayers have more – because the mayor is spending money. On the other, they have less, because taxes are higher. Since – in theory – they are only paying as much more in taxes as they receive in extra income, the lawn cutting and painting seems to be “free” extra GDP.
Wait a minute. If this were so, why not hire everyone in town and triple or quadruple taxes? Why not? Because it doesn’t work. It would only work – and only in theory – if the extra work undertaken by the government were equal in value to the work undertaken by the private sector. Otherwise, each person diverted out of the private economy merely becomes a zombie worker – producing something that may or may not be worthwhile.
What about just hiring the jobless people? That would increase income, right? And then you wouldn’t be taking anything away from the private economy, right?
Wrong. You still have to take away money. And if you raise taxes by the amount of money you put into the system, you are taking the money away from the private economy. The public sector grows, compared to the private sector. The gross amount of extra taxes may be no higher than the gross amount of extra spending, but the private sector surrenders more of its income in order to pay for the spending by the government.
Adding more zombies only makes it appear as though income has increased – as in a wartime, full employment economy. In fact, keep multiplying wealth according to the “balanced budget multiplier theorem” and you will soon have none left.
Bill Bonnerfor The Daily Reckoning
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.
When you start seeing schemes and articles like this pop up, you absolutely know we are in deep doo doo
c’mon mr. bonner!
we have prez0!
he can hire more wombats, and stoolies, AND extend tax CUTS!
just have batmanke push this here button for a coulpa trilndollabill, bill.
just do NOT look behind the curtain.
then, pretend, with us all, that there IS no curtain.
besides, it is still a SECRET!
What? You mean to say that Schiller’s Perpetual Motion Money Machine doesn’t work? And there is no Santa Claus?
Personally, I’d take that government job at a salary of one million per year, even if I were in a 90% tax bracket. I promise to spend all of the 100k take-home.
If there is, there is a clear advantage for asians over others. Asians, in general, predominantly buy low-cost goods, used to low-cost consumption, live in low-cost housing unit. When they engage in war, they even deploy low-cost strategy, low-cost military hardware; which is to say they prefer to fight a low-cost war.
In Vietnam, US adopted a high-cost war whereas Vietnamese adopted a low-cost war. In the end, the outcome was unpredictable.
A real perpetual wealth machine?!!! Amazing!!!!!
@Drunk: “perpetual motion money machine” is the best description Ive read so far. brilliant.
This is such nonsense that you should be Very, Very Worried (VVW) when a major newspaper prints it.
Oh what a tangled web we weave, When first we practivce to disceive (ourselves).
Governments disceive themselves into thinking they can create jobs.
Jobs are a by-product of the need to create and harvest goods and services and resources.
As soon as government tries to create a job rather than to satisfy a need, by providing a valued service, they have deceived themselves. They have then got it back a$$wards.
Leave people be and it will be seen that there is no shortage of human needs and therefore no shortage of jobs. (Any shortage of jobs that could be done around your house and town? I rest my case).
But conversely a shift to a genuine gold standard would be devestating in its deflationary implications. This part of the Keynesian analysis at least is correct.
Monetary easing has validity but only to combat genuine deflation. This policy is abused when it is used simply to monetize excessive debt as is increasingly the case. The solution to the government and municipal debt black-hole is restructuring followed by a consistent balanced budget policy.
For those interested in a balanced and more detailed discussion of the relative merits and demerits of the Keynesian and Austrian schools of economics please read my paper:
LOGICAL FOUNDATIONS OF A SELF-ORGANIZING ECONOMY. Which is freely available for download at the scribd.com website. Thanks.
In reference to the above
“It has long been known that Keynesian economic stimulus does not require deficit spending. …”
I am 50 years of age and seemingly overnight find myself living in a country of morons. There is no hope for the USA because you can’t cure stupid…it is a lifestyle choice.
In your analysis you left out an important “failure factor”: The govrnment employees who administer the funds and supervise those newly created “jobs”. Wander a few blocks from the tourist center of D.C. Look at the buildings and think of the occupants and who pays them. The road to bankruptcy is shorter and slipperier each day.
Your problem with increasing employment is only valid when, and assumes no increase in the services and goods available for sale. Inflation is a result of stagnant or diminishing supply in the face of rising demand.
Therefore your conclusion or assumption that increasing employment only exacerbates the problem is only true when supply of goods & services are not increased. This is an invalid assumption for most economic possibilities except where supply is restricted.
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