Tuesday, 18 November 2008

Why stimuli fail

How are government "stimulus" packages supposed to work? Jeff Perren points to an answer in the Wall Street Journal: "Government stimulus bills are based on the idea that feeding new money into the economy will increase demand..." But identifying where the government gets the money from explains why such stimulus doesn't work the way it's supposed to, if at all. Says Jeff:

I strongly urge everyone to read the entire article, which uses "infrastructure spending" as an example.

There should be no subject more topical for a NZ taxpayer.

Meanwhile, the Onion asks whether the government should stop dumping money down a giant hole [hat tip Berend].

UPDATE: Meanwhile, here's Lynne Kiesling on prospective attempts to build a better economy by mis-allocating (or destroying) capital. To paraphrase a popular recent ad campaign, "No We Can't." [Hat tips Art Carden and Will Wilkinson]


  1. This leaves me rather shamefaced I have to admit, as for a long time I've held the opinion that stimulus packages were a viable solution. However, this was based on what I'd learned in history lessons at school which touted the spending of FDR's administration, and Michael Joseph Savage's similar policies as the saviours of struggling economies.

    A lot of the material I've read in the past few weeks has put me right though. I like this gem about Government spending from usnews.com: The money ultimately comes from taxpayers, and the government generally spends money less efficiently than consumers

    The word verification for this post... 'nongate'. Is that a scandal that turns out to be nothing important?

  2. It's not all bad but really depends on what the money is spent on. Investing in our children could be a positive investment: upgrading schools, better homes etc.

    It's the bridges and roads to nowhere we need to watch out for.

    Don't assume government always spends inefficiently. Judging by the size of the private debt mountain, consumers are doing a pretty good job of wasting money themselves.

    Not that I'm advocating bigger government :-)

  3. Wouldn't dream of it, Raf! :)

    And the private sector might be racking up debt faster than you can say to hell with prudence, but unlike public expenditure, it's their own debt, not mine or yours.

    And as for 'better homes': whose homes? Surely you're not advocating ever more expenditure on state housing?

  4. Raf

    It's bad. Always is, always will be. The reasons are many:

    Got can't calculate. As Von Mises pointed out in the 1920s, the government planner has no way of knowing where to put resources or what they are worth. He can't calculate the value of differeing outcomes with any confidence. He cannot determine which resource of what value to direct to any particular activity. Hell, he can't even measure value because his very existence is a distortion hindering the measurement of value.

    Government can't enforce morality. As soon as government strays from its purpose for existence (protection of individual rights), then it is behaving in an immoral manner anyway.

    Government can't do the right thing for everyone. It is not omniscient. It is not omnipotent. It sure aint all good. So, when the govt takes your money and gives it to someone else (taking a big fat cut along the way), how is it determined that is the correct thing to do?

    The government and its staff does not bear the costs of its consumption (what some call "investments"). It expropriates money from productive individuals and spends it on various schemes (and the feeding of its own staff and conies). If (when) things go wrong, all government does is consume more. No-one is responsible for the failure. Still, you get to pay- why is that? Why do you get to pay? It wasn't your failure

    That's merely for starters. As for the government "investing" in children, NO MORE PLEASE! They've buggered up enough already. Stop impoverishing the children's parents and siblings by stealing money from them. Let them decide how to teach THEIR children with THEIR own money and resource. After all, whose children are they.

    Government is totally unsuited to any task other than protection of individual rights. Any other activity government gets involved with is an abrogation of those very rights. Should not be done.


  5. ANN: In fact, while FDR was still trying unsuccessfully to inflate the American economy out of the depression that the monetary inflation of the twenties had caused, Michael Joseph Savage was inheriting an economy that had already recovered.

    And what got NZ (and the UK, its chief trading partner) out ahead of the US was the very opposite of "stimulus packages": they slashed spending, cut public service wages, and allowed private sector wages and prices to fall.

    You'l notice however which prescription is more politically tenable in the short term, however destructive it has always proven to be in the long term -- and which one is about to be followed by the Key Regime.

    RAF, you said, "Don't assume government always spends inefficiently. Judging by the size of the private debt mountain, consumers are doing a pretty good job of wasting money themselves."

    Yes, they have -- but don't forget that the debt mountain couldn't have been created without the year-on-year mountains of monetary inflation pumped out by the government's Reserve Bank here, and the US government's Federal Reserve over there, all of it brought into being through the inherently bankrupt fractional reserve system, a fraudulent and unstable system which would be impossible without the government's support.

    And there's one very important group whom you overlook: PRODUCERS!

    While consumption certainly "wastes" money (except when you remember that's what the whole economy is for). what producers would be doing with the money oif left in their hands would would be producing real wealth.

    Taking it out of their hands to create an artifical stimulus is almost precisely taking new food out of ourt mouths, and is nothg more than the consumption of real capital.

  6. Jim Rogers said govt stimuli means taking money from the competent and giving it to the incompetent.

    Speaking of monetary inflation the helicopters are flying non stop.


    Dot.com & housing bubble are going to be small fry compared to the government bubble.


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