Friday, July 02, 2010

Stimulus, Explained

The Curmudgeon has a post up at his place about the latest G20 conference. It's full of excellent stuff, check it out.

The current administration tried a Keynesian stimulus this year and the consensus is that it mostly fizzled. Some in Washington are arguing that it just wasn't enough given the size of the US economy and what's needed is a lot more stimulus. The rest of the Keynesians seem to be arguing that the amount wasn't the issue, the stimulus funds were misapplied (not targeted properly) and so nothing of consequence happened. The non-Keynesians think the idea of a stimulus in this context is absurd.

What might be helpful for those among my readers who were English majors is to explain what a Keynesian stimulus is and what it isn't. Generally reporters use the medical analogy of a 'shot in the arm' which is entirely accurate from a non-Keynesian perspective, but falls short of what Keynes proposed.

Imagine if you will, that the US government wants to give you one billion dollars. They do. The Treasury borrows the money at a bond sale and delivers to you one billion dollars in bills of various denominations. It's a pretty stack of mostly green paper. And it's sitting in your front yard. What do you do with it?

What they want you to do with it is to spend it. Buy yourself a mansion and a yacht. Palliate your greedy conscience by buying a hybrid SUV. Put solar panels on your new mansion. Travel. The money you spend will create materials and jobs. The workers at the solar cell factory go forth and spend their wages on more goods and services and the economy restarts.

What they don't want you to do is call your your broker and buy Treasuries. The only stimulus the economy gets from that is the broker's commission and then only if he is a spendthrift.

The Keynesian nightmare is if you have a weenie roast with all the pretty money. You blow one dollar on lighter fluid, another nine dollars on hot dogs and roast frankfurters over your new bonfire. One billion dollars up in flames to cook ten dollars of groceries. And more to the point, one billion dollars in new liabilities with no assets accrued to pay it off.

The bottom line: Even assuming a stimulus could work, the stimulus as it was done only increased our national debt without increasing wealth to pay it off.

As for why 'shot in the arm' is not the best descriptor? It's only apt if you think borrowing more money to spend is analogous to shooting up with methamphetamines. The drugs will indeed get you going, but you're going to be needing more of them for a smaller effect in the near future.

Were I a Keynesian, I'd be saying 'push start' the economy. The idea being that you borrow the money to spend it on stuff that will have the maximum impact on restarting economic activity. Hopping out to push a stick shift car is a better analogy for that sort of thing. If it works, you travel in safety and comfort to a gas station and buy a new battery. Which means you won't be doing it all over again in the near future.

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