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TMFEldrehad (100.00)

More Borrowing?

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July 13, 2009 – Comments (18)

We Need More Stimulus and More Government Borrowing

Well, at least according to at least one economist, Robert Shiller.

Never mind that our national debt burden continues to grow.  Never mind, I suppose, that Uncle Sam now owns huge stakes in giants like General Motors and AIG -- and we are not even close to understanding the long-term ramifications of this unprecedented governmental intervention in the U.S. economy.

Now, I suppose Mr. Shiller has reasons for his position, and I'm sure he's not alone, but I'm personally quite wary of such arguments.  "It's broken, the government should fix it!" is certainly sometimes a rather popular rallying cry, but I am not sure this is always the best solition.

Perhaps I'm oversimplifying (and I likely am), but when we're calling for government borrowing and stimulus, what are we really doing?  Well, the stimulus part is readily understood I think -- we pump money into the economy in order to help prime the pump and get the ball rolling again.  Okay, fair enough, but where's that money coming from?

Oh yeah, we're borrowing it.

Okay, but from whom?

From ourselves, from the taxpayers, as we're the ones that will ultimately have to pay the loan back (or, in the case of ever revolving debt, keep paying the interest in perpetuity).

So, that means that the money that we're borrowing and spending today in order to save/create jobs (and everything else we're trying to do) comes at the expense of tomorrow -- so we're sacrificing jobs tomorrow for the sake of jobs today.  Fair enough.  I mean, a lot of people are out of work, unemployment is particularly high, so it makes sense, right?

Yeah, but how many jobs are we sacrificing tomorrow in order to save/create jobs today?

The truth is that we're sacrificing more of tomorrow's jobs than we're getting in terms of saving/creating today's jobs.  Why?  Well, interest on the debt if for no other reason.  We're pulling more money out of the economy later (in terms of interest and debt repayment) than we're pumping into it today as a result of the stimulus spending.

And this doesn't yet consider how smart or foolish the capital allocation decisions are.  Now, while not always true, I believe that much if not most of the time the private free market does a better job of allocating capital than government can (again, there are exceptions to the rule).  So not only are we paying more in terms of dollars (and economic prosperity) tomorrow, the money we're getting isn't as 'smart' as the money we're losing.

Yes, indeed, this is overly simplified....  and I'm sure there are real economists out there who can make very good, sound arguments as to why more borrowing and stimulus may be a good thing.  I, for one, will remain unconvinced.

My fear is that in the long run we will discover that the costs were simply too high...  by then, I suppose it'll be too late -- besides, it will be a different set of politicians who is stuck dealing with it.

Regards,

Russell (a.k.a. TMFEldrehad)

 

18 Comments – Post Your Own

#1) On July 13, 2009 at 2:44 PM, outoffocus (24.49) wrote:

Can't spell Shiller without "shill".

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#2) On July 13, 2009 at 2:50 PM, outoffocus (24.49) wrote:

Also, you say you're oversimplifying. How do we know it isnt the government that is oversimplifying.  After all, they are the ones who believe the solution to an economic downturn caused by too much debt is to throw more debt at it. Its like they are saying "oh my gosh theres a huge fire, lets smother it with some straw!".

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#3) On July 13, 2009 at 3:35 PM, Imperial1964 (97.89) wrote:

You eluded to something at the heart of much of this--pulling forward of demand through borrowing and spending.  That is what we have been doing collectively as an economy and that is what is at the root of the problem.  Excess capacity is everywhere and demand is weak as the country is going through a deleveraging.

I'll agree that the government's engaging in similar fiscal recklessness is not the answer.  I suppose the Keynesian argument is that the government needs to step in temporarily and spend big to ease the temporary drop in demand.  While the idea is attractive, I believe it comes up short when applied in the real world.

First, the government has to borrow or print the money.  Our government's deficit spending is unsustainable.

Second, the government will never pay the money back, burdening us with interest payments into perpetuity.  They are solving a short-term problem by creating a long-term problem.

Third, I'm not convinced this is a typical cyclical downturn.  It may be a few years before we get back to normal growth.  A "temporary" stimulus will not get us the snap-back they are expecting.

Fourth, look at how well defecit spending, easy credit, and "quantitative easing" fixed the Japanese economy.  It hasn't worked, but they still keep trying it.

I'm afraid the excessive government debt may become a larger problem and sooner than most expect.

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#4) On July 13, 2009 at 4:22 PM, MikeMark (30.48) wrote:

Well thought out. As always, thank you.

I believe that much if not most of the time the private free market does a better job of allocating capital than government can (again, there are exceptions to the rule).

Please name an exception. I believe that a free market will always do a better job of capital allocation. Please change my belief if you can.

Recommended reading:

Economics in one lesson by Henry Hazlitt is a fantastic book. It's even available online free here:

http://jim.com/econ/

Economics for Real People by Gene Callahan.    This is an Introduction to the Austrian School (of Economics). Reading it will give some insight into what the Fed is attempting and whether it will really have a good effect.

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#5) On July 13, 2009 at 4:43 PM, dividends4ever1 (< 20) wrote:

I just sit back and look at my kids and then think of their kids and i get chills.

Though we can imagine it, the future for our kids is scary.

Why? Because things have a way of slowly moving up on us and when they do hit, it is usually devastating.

 

www.compdivplan.com 

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#6) On July 13, 2009 at 4:56 PM, TMFEldrehad (100.00) wrote:

I believe that a free market will always do a better job of capital allocation. Please change my belief if you can.

There are certain circumstances of which I'm sure you're aware when the free market is unable to price goods and/or services appropriately as not all of the costs and benefits associated with the transaction are reflected in the pricing mechanism.  Government allocation of capital (or other intervention) in these cases is therefore necessary.

National security/defense could be one example.

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#7) On July 13, 2009 at 5:35 PM, portefeuille (99.75) wrote:

-------------------------

...

Without a radical change of strategy, the ECB risks pushing the weakest states into a debt-compound spiral that can only end in bond crises and/or the disintegration of Europe's monetary union – whichever comes first.
The International Monetary Fund says the eurozone will contract by 4.8pc this year, worse than the UK (-4.2pc) or the US (-2.6pc). The deepest damage will occur next year as Europe remains mired in slump, even as the rest of the world recovers. It is the length of recession that matters most for jobs, social stability, and public finances. I am not easily shocked any longer but I did sit up when Spain's budget chief Luis Espadas said the economic collapse could "easily" push Spanish public debt to 90pc of GDP by 2011. This is up from 36pc in 2007.
Nobody knows where the tipping point lies on public debt, though anything above 100pc of GDP in a currency union is courting fate. Some are already there. The European Commission says Italian debt will jump to 116pc in 2010. Greece is vaulting back to 109pc, Belgium to 101pc, France to 86pc.
Even German finances are falling apart. After screwing down spending to balance the books, discipline has broken down. Berlin says the deficit is heading for 6pc next year, taking debt to 82pc. This is happening all over the world, of course. But the ECB is compounding the effect, whether for reasons of politics, Bundesbank fetishism, or misjudgment. By refusing to join the US, Japan, Canada, Britain, and Switzerland in quantitative easing (QE) the ECB has allowed a contraction of private credit this summer. The M3 "broad" money supply has shrunk since February.
Ignore M3 at your peril. It flashed awarning signal in the US months before the collapse of Lehman Brothers last September; it is flashing the similar warning signals in Europe now.
Professor Tim Congdon from International Monetary Research said the eurozone money figures are "horrifying" and portend a serious crunch ahead. "My verdict is that the senior people in the ECB [and the Fed] have little organised understanding of the debt-deflationary processes initiated in late 2008," he said.
Ireland's M3 contracted at a 30pc annual rate last month, a death sentence for a hyper-indebted economy. The wreckage will be evident just in time for the Irish to vote again – under extreme duress – on the EU's Enabling Act in October. This should make for interesting political chemistry.

...

-------------------------

(from here)

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#8) On July 13, 2009 at 8:18 PM, LydiaVorst (< 20) wrote:

TMFEldrehad,

Very nice post, thank you.

Although I used to think that there were certain circumstances where the government was necessary in place of the free market, I think that less and less...

You wrote:

There are certain circumstances of which I'm sure you're aware when the free market is unable to price goods and/or services appropriately as not all of the costs and benefits associated with the transaction are reflected in the pricing mechanism.  Government allocation of capital (or other intervention) in these cases is therefore necessary.

National security/defense could be one example.

Do you remember reports of the military spending thousands of dollars on one toilet and hundreds of dollars on single nuts and bolts?  Did you know that the Dept of Defense (like the Federal Reserve) has never been audited? I didn't know that but just read it in an interview with Nick Turse, author of "The Complex ."

http://www.motherjones.com/politics/2008/04/real-life-matrix 

As Dwight D. Eisenhower said,

"In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist."


 

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#9) On July 13, 2009 at 8:41 PM, MGDG (39.22) wrote:

Just off the top of my head I can think of a few private enterprise that did a poor job on allocation of Capital. Enron. Worldcom, GM, AIG and any number of companies that have gone bankrupt over the years.

Some were from poor allocation of Capital and some were from fraudulant business practices. Not much different than what you see in Government many times. I'm of the belief that private business can do it more efficiently than government, as long as they are given a level playing field.

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#10) On July 13, 2009 at 10:25 PM, ReadEmAnWeep (73.03) wrote:

"There are certain circumstances of which I'm sure you're aware when the free market is unable to price goods and/or services appropriately as not all of the costs and benefits associated with the transaction are reflected in the pricing mechanism.  Government allocation of capital (or other intervention) in these cases is therefore necessary."

 

Another example would be a nuclear power company in a completely free market dumping all the waste in a river that flows past them. In a completely free market, companies are amoral. So the government must pass laws to stop them.

 

" Do you remember reports of the military spending thousands of dollars on one toilet and hundreds of dollars on single nuts and bolts?  Did you know that the Dept of Defense (like the Federal Reserve) has never been audited? I didn't know that but just read it in an interview with Nick Turse, author of "The Complex .""

 

This is called year marking, it was one of the points of the presidential debate last fall. They both pointed out that year marking was less than a half of a tenth of the budget for those that did it. That number is probably fudged and even if it is accurate and their budget it 100 billion then that is still a lot of wasted money. But they said it was small?

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#11) On July 13, 2009 at 10:34 PM, abitare (99.46) wrote:

bostoncelitcs

Great idea. War bonds to fund war on terror...that war would be short.

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#12) On July 13, 2009 at 11:14 PM, whereaminow (77.51) wrote:

I've written about Rober "the shill" Schiller before. He is a behavioral economist.

David in Qatar

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#13) On July 13, 2009 at 11:40 PM, devoish (98.78) wrote:

All borrowing is a drain on future earnings, whether it is done by the gov't an individual or a corporation. A house that is built today does not need to get built tomorrow. Tax cuts that Reagan enacted were spent/invested/stimulated outside the USA funding the growth of China, Mexico etc. Taxes that were collected before then were reinvested by government in American in fratsructure funding the growth of the USA.

I agree with the sentiment of President William Harding in 1921 when he said "It has been proved again and again that we cannot, while throwing our markets open to the world, maintain American standards of living and opportunity, and hold our industrial eminence in such unequal competition. There is a luring fallacy in the theory of banished barriers of trade, but preserved American standards require our higher production costs to be reflected in our tariffs on imports."

And again in 1922 after he raised import tarriffs "During its longer session the present Congress enacted a new tariff law. The protection of the American standards of living demanded the insurance it provides against the distorted conditions of world commerce The framers of the law made provision for a certain flexibility of customs duties, whereby it is possible to readjust them as developing conditions may require. The enactment has imposed a large responsibility upon the Executive, but that responsibility will be discharged with a broad mindfulness of the whole business situation. The provision itself admits either the possible fallibility of rates or their unsuitableness to changing conditions. I believe the grant of authority may be promptly and discreetly exercised, ever mindful of the intent and purpose to safeguard American industrial activity, and at the same time prevent the exploitation of the American consumer and keep open the paths of such liberal exchanges as do not endanger our own productivity."

The ability to make intelligent decisions has not left us. The willingness to abandon such decisions is moronic.

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#14) On July 14, 2009 at 9:47 AM, outoffocus (24.49) wrote:

" Do you remember reports of the military spending thousands of dollars on one toilet and hundreds of dollars on single nuts and bolts?  Did you know that the Dept of Defense (like the Federal Reserve) has never been audited? I didn't know that but just read it in an interview with Nick Turse, author of "The Complex

Its not that the Department of Defense has never been audited. Its that the DoD cant be audited.  Every year the DoD gets a disclaimer on its financial statements because their financial reporting is in such poor shape that they cannot even get a qualified opinion on its financial statements.  But the Department of Defense gets audited all the time. See www.gao.gov and www.dodig.mil.

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#15) On July 14, 2009 at 2:24 PM, dbjella (< 20) wrote:

 bostoncelitcs

Please stop posting auto start videos.   

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#16) On July 14, 2009 at 7:07 PM, BigFatBEAR (30.29) wrote:

Krugman (who is Keynesian) had a great blog post recently, that discussed savings and how the "paradox of thrift" is sort of forcing governments to cut and borrow. The article can be found here: http://krugman.blogs.nytimes.com/2009/07/07/the-paradox-of-thrift-for-real/

Also, have a gander at this chart:

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#17) On July 14, 2009 at 7:37 PM, portefeuille (99.75) wrote:

(from here)

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#18) On July 25, 2009 at 2:16 PM, ikkyu2 (99.45) wrote:

Russell, you're a fiscal conservative, and have sound-money instincts, the kind drilled into you by your folks, no doubt.

Our money supply is sort of like kinematics versus relativity.  On the micro scale - your household, my small business - US dollars are like real money.  They're non-fungible, they sit in a bank account or under a mattress without yield, and we don't engage in currency or rate risk swaps.  (And momentum equals mass times velocity.)

On the macro scale - what banks and Treasury do - our currency is totally fungible.  Money supplies and interest rates are set by fiat.  Sound-money instincts can't drive those kind of policy decisions in that case.  (Near the speed of light, mass and velocity both have to have the Lorenz corrections applied.)

A lot of people get sidetracked here and start shouting how terrible fiat currencies are until they're blue in the face.  But like it or not, we have one.  It's not right to talk about transferring costs to future generations, because the money supply is fungible.  The right way is to look at wealth transfer - who's winning and who's losing from the current policy decisions.

Depressing, but a fact of life in 2009 America. 

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