I have to wonder why it is that 20 years after Keynesian fiscal policy's been disproved, and replaced by Friedman & monetary policy, people still understand the economy as if Keynes were still prevailing wisdom.
Keynesian fiscal policy requires the government to engage in managerial intervention. The USFG raises taxes and cuts its spending during boom periods so as to supposedly prevent inflation or "overheating", and lowers taxes and increase spending during bad periods to "stimulate" the economy by allowing consumers to have more money during bust periods.
1) Government investment & government projects "crowd out" private sector investment because government spending requires the USFG to borrow money, which increases our interest rates, i.e. increases the difficulty for consumers to borrow money from banks
2) Tax 'rebates' come from the USFG borrowing more money, unless it cuts spending, which a Keynesian government wouldn't do because for its project to work it has to invest in public projects, so it never can cut spending. Therefore either the Fed creates more money and creates inflation, or it raises taxes, both which raise prices and make things more expensive.
3) Timing. Even if the idea of a stimulus worked, the time it takes for sluggish legislation to meander its way through the government, its prescription levels will be off because key figures will have changed dramatically enough to make it either too much or too little.
4) The USFG is bad at a lot of things, one of them is gathering information and forecasting; if it forecasts incorrectly or prescribes incorrect numbers because it used poor information then it can again cause more harm than good.
From NPR*
"Love that word—stimulus. It sounds so scientific. With the right stimulus, you can even make the leg of a dead frog twitch. A heart attack victim gets the stimulus from those chest paddles and bam. Back to life. My online dictionary defines stimulus as something that "rouses or incites to activity." Sounds like the perfect prescription for an ailing economy.
But if politicians know how to stimulate the economy, why wait for a recession? If you can make the economy grow, why wait for bad times?
One answer is that a healthy patient doesn't need medicine. But the other possibility is that it's all hot air. Maybe we don't know how to make a $14 trillion economy move very quickly. And if we did, it would take a lot more than an injection of even 125 billion dollars.
There's that scientific language again—an injection. The politicians are always going to inject some amount of money into the hands of consumers and into the economy, like a doctor giving a lifesaving blood transfusion. But where does the economic injection come from? It has to come from inside the system. It's not an outside stimulus like the chest paddles or the transfusion. It means taking money from someone or somewhere inside the system and giving it to someone else.
The standard stimulus package doesn't change incentives. It's a check from the government. The hope is that the receiver will spend it. But when you just send out checks from the government, whoever gets stimulated is likely to be offset by someone who gets unstimulated.
The money has to come from somewhere.
- If you raise taxes to fund the plan, the people who are taxed are poorer and they'll spend less.
- If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus.
It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn't get any deeper.
And even the people who get the money often save more of it than they spend.
That's why stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician's approval rating.
I'm not saying that economy policy is irrelevant. Economic policy matters because it affects the long-run growth of the economy. I'm all for policies that make us more productive or innovative by changing incentives. But those policies take time. There's little any economic doctor can do to move our $14 trillion organism of an economy in the next few months.
Politicians who work in the Oval Office—or those who seek to work there—would be wise to remember that patience is a virtue. Focus on the policies that lead to growth over time. Expecting results overnight is bound to lead to disappointment."
No comments:
Post a Comment