Stimulus spending is a waste of money

[Michael]

I didn't like the first 'stimulus bill' at all and I'm definitely opposed to a second one. I consider this to be a massive waste of taxpayer money and a totally selfish policy to force one's grandchildren to pay for present day egos (and that's exactly what is being done).

I shall attempt here to describe my reasoning. There are two components to my argument. First of all there is the issue of job subsidies vs welfare (which is an inefficient trade-off) and secondly, there is the issue of Keynesian theory which I argue is being interpreted incorrectly (meaning that it doesn't work well if it isn't applied correctly and we're not applying it correctly). I'll split my argument into two posts, one for each of the two points mentioned here.

* * *

When a recession hits, aggregate demand declines. Actually, its the other way around - a drop in aggregate demand is called a recession. Nevertheless, the key issue is the overall drop in aggregate demand. This drop in demand (or a fall in sales) often puts badly managed companies over the edge into bankruptcy (and creating lots of unemployed workers). Well managed companies tend to just cut back with some layoffs (creating more unemployed workers). All these unemployed workers tend to cut back on buying stuff (or default on their mortgages) which tends to cause an even larger contraction in aggregate demand.

So the "real" problem here is the large surging numbers of unemployed. That's the "damage" that one might want to contain here as that is real human misery. The question is, how to go about doing that.

One way to address the problem is to create a massive 'stimulus' spending package from the government where a whole bunch of money is just thrown around in any way possible for the sole purpose of increasing aggregate demand. Obviously, some of this money is going to end up giving jobs to some people (reducing the unemployment rolls), but overall, much of the money spent on 'stimulus', once filtered through a layer of politically well connected government contractors, goes to pay for imported materials, or paying off bank debts, or paying bonuses and commissions for those clever people who managed to get their fingers into the government pie, or to supply profits/dividends to the people who own these well-connected government sub-contractors.

I respectfully submit that only a small portion of the money 'invested' through a general government stimulus spending bill actually ends up in the pockets of people who really, really need a job.

For example, if GM lays off 100,000 workers, how many of them will get new jobs from a stimulus spending bill? A massive infrastructure program is going to make cement suppliers (and their shareholders) very happy - laidoff auto workers not so much. If all you are interested in is aggregate spending, then this shouldn't matter. Big fat profits at cement companies is just as much part of the economic pie as the income of laid off auto workers.

However, this policy has the ultimate effect of giving 'extra' money to those who already have jobs/money and hoping that this 'extra' bit will help spur additional economic activity that will ultimately (and hopefully), create some new job for that unemployed auto worker who (in the meantime, is eating dog food to survive). I respectfully submit that this process is slow, inefficient and extremely wasteful since all we are really concerned with here is trying to help the poor bastards who've lost their jobs in the first place. Giving billions to people who haven't lost their jobs doesn't seem like an efficient way to help those who have lost their jobs.

Given that the real problem with recessions is that fact that so many people loose their jobs and that this is a 'human misery' that we might want to mitigate, I respectfully submit that giving money directly to those affected is a far more efficient and effective method of mitigating the human misery caused by the recession since it cuts out all the extra middlemen.

That is to say, if a recession hits and the big problem with recessions is the huge number of people losing their jobs (and possibly losing their houses, etc), then the best way to deal with that problem is to just have a temporary and massive increase in the value of unemployment benefits.

For example, the $800 billion 'stimulus' bill could directly be used to pay 16 million unemployed people a one year income of $50,000. That figure is indeed several times larger than the number of people who have actually lost their jobs in the US due to this recession.

But no, Congress passed an $800 billion spending stimulus bill that seeks to 'hopefully' create 3 million jobs (as long as you have your fingers crossed and all the best-case assumptions hold up).

I think 16 million paychecks beats 3 million paychecks for the same amount of money.

But of course, welfare for 16 million people doesn't flatter anyone's egos, or put money in the pockets of favored political supporters, so this policy isn't followed or supported by Congress.

I'll address the flawed interpretation of Keynesian theory in my next post.

[Korimyr the Rat]

I don't normally get to agree with Michael without reservation.

This is one of those rare instances.

[Michael]

I don't normally get to agree with Michael without reservation.

This is one of those rare instances.
Indeed, quite rare. I don't believe we've ever agreed on anything before! :D

[Michael]

As mentioned in the OP, here is the second part of my post addressing Keynesian theory.

Keynesian theory is really quite simple. It posits, based on a balanced fiscal position, that using a deficit to finance an expansion of government discretionary spending during an economic downturn is generally good policy since it can and will reduce the overall levels of unemployment (that tends to rise during a recession). The is essentially a 'counter-cyclical' theory that suggests governments ought to increase discretionary spending during recessions - and decrease discretionary spending during growth cycles.

That seems simple enough. However, there are some assumptions here to go along with the theory. That is, the theory is predicated on a balanced fiscal position. Keynes did not assert his theory based on countries running 'stimulus deficits' continuously for half a century. Keynes specifically predicated his theory on governments reducing their discretionary spending during the growth cycle within the context of an overall balanced fiscal position.

Thus, there are several reasons I have for not believing that Keynesian theory produces much effect. I certainly believe that Keynesian theory is reasonably efficient, if followed completely. But that's not what is actually done. No one follows Keynesian theory at any time other than during recessions - which is essentially just an excuse to spend even more money. Running non-stop fiscal deficits for seventy years in a row, then expecting that some 'new' fiscal deficit is actually going to work well as a stimulus is a foolish expectation.

In other words, fiscal stimulus works well, but only in moderation. After running 70 years of consecutive fiscal deficits, I believe that the fiscal stimulus effects of deficit spending is already pretty much maxed out (or is anemic at best).

A secondary argument is that Keynesian theory was also constructed at a time when the labor component of government spending was much higher than it is now. Back a half-century ago, if the government spent a million dollars on some infrastructure program, one could expect that some 60-75% of the money would end up being paid out in wages. Now, labor costs are a much lower proportion, so that for any given amount of government spending, a correspondingly smaller number of jobs is actually produced. This futher reduces the stimulus effect of deficit spending.

Now it may be true that just about any spending from the government during a recession is stimulus by definition, but this is only true if all you are concerned about is this year's aggregate numbers alone. If that's all you are concerned with, stimulate as much as you like.

However, given that the money used to create the stimulus 'now' is debt-financed, meaning it has to be paid back later with interest, that means that unless the spending that one engages in is productive, or somehow increases the economy's productive capacity, then one is essentially paying a high price down the road for a short term gain today. That's why everyone always talks about infrastructure. Investing in public infrastructure has the effect of increasing the overall economic capacity of the nation, thus increasing the tax base down the road - which theoretically can pay the interest and debt incurred for the stimulus spending 'now'.

All of this should make it clear that the $800 billion 'stimulus' spending package passed by Congress isn't actually likely to produce a big Keynesian style stimulus bump for the economy. And what little bump one does get here, the price is a mighty steep one down the road since the vast majority of the stimulus package (tax cuts) essentially reduces the nation's ability to repay the debt, and/or is just being spent on non-productive consumption (which doesn't produce an increase in tax revenue potential to pay back the debt).

Thus, I support Keynesian theory - in theory. If we applied it the way that it was meant to be applied, then I believe that it works rather well. However, we don't apply Keynesian theory in the way that Keynes invented it - we apply it in the way that is most convenient to our political elites, which means we just engage in massive deficit spending on a permanent basis and call the same policy "Keynesian" during a recession. We never reduce spending or balance the fiscal position (or reduce the debtload) during the up-cycle which is what is required to make Keynesian theory work.