The fallacy of "stimulus"

Discussion in 'Economics' started by plyka, Sep 13, 2011.

  1. plyka


    It amazes me that Keynesian economics still has a home in mainstream economic and media thought. The idea of "aggregate demand" was debunked 100 years before Keynes even brought it back up. In fact, the Classical Economists of the 19th century would use it as a litmus test to detect ignorant economists.

    The idea in its basic form is something like this:

    The economy is struggling, easy monetary policy and fiscal stimulus (government spending) increases something called "aggregate demand," spending increases then business activity increases, products are demanded, businesses hire and the economy improves. Let's focus on the fiscal stimuli in this thread. This argument has no starting point, it is similar to an idea of 0+0=infinity. For if this idea works, then why doesn't government just spend 100% of all income and we'd all be rich? In fact, why not just give every American $1,000,000,000 and so we would all be billionaires?

    It's a fallacious idea simply because government has nothing to spend. Everything they get must come from somewhere. So the starting point is not government spending -> increase aggregate demand. It must start from: government taking X, government spending X -> increase aggregate demand. If goverment spends as a "stimulus" where does this money come from? It comes from the private sector. So basically, it is a stimulus to take money from the private sector and have government spend it? How can this be stimulus? At best it is a reallocation of resources, instead of individuals allocating resources the government allocates resources.

    First off, there is no such thing as agg demand being separate than "agg production." Consumption always equals production. So the only argument that can be made is that the money that government spends is actually spent instead of saved/invested, and this is somehow better than leaving it up to individuals to decide the appropriate ratio of spend/save/invest. It is absolute hogwash and it comes down to the point of: the economy is about resource allocation. There is an appropriate level of investment/saving vs spending, not only do the government stimulus people think that a central planning authority better determines how much is spent vs saved/invest, but that the actual spending itself is better determined by a central authority than by individuals.

    If this was the case, wouldn't North Korea currently be the starring shining light on economic progress? Wouldn't it be the economic power of the world, since of course 100% of the resources are allocated by a central authority?

    Here is Milton Friedman on the subject. The original question is slightly different than the point covered here, but the answer by Friedman is relevant:
  2. The only thing the Government can do is pull money from future taxpayers and get it into the economy today.

    Of course, creating demand where there is none does nothing to grow the economy, it only causes inflation or soaks up excess supply.
  3. No aggregate demand still exists it is just the way that is applied that is of debate. All transactions are aggregate demand. It is the implementation of outside intervention to boost aggregate demand through fiscal policy that is controversial. Monetarists use aggregate demand control through monetary policy. Austrians do not intervene however the concept of aggregate demand still exists.

    What you are describing is called money illusion. It is a well known concept however even if keynesian is a complete fallacy in practice it is something that will always be applied because of political necessity to appease the masses.

    I have linked to an article on my blog you might find interesting about Monetarism.
  4. I think you are missing a number of economic points. You have completely taken velocity of money out of the equation. The mechanisms that increase aggregate demand really transfer wealth from people that spend little to those that spend a lot. You are right that this practice alone does not increase production, but it does enable the money to get to people that start or operate businesses and leads to greater output.

    You are also looking at it purely from a domestic side. The international demand and output can be directed in to your economy by changes in currency valuation that happen through aggregate demand controls.
  5. Keynesianism was just simple common sense: save when times are good, spend it when times are bad.
    The left has a problem with the first part, the right with the second part. Except in the US, where the right does the first part, then complains when the left does the second part.
    None of it - monetarism, Keynesianism, Austrian stupidity, or anything else - works if your economy doesn't innovate. Ask Greece. Even better, ask Japan. They prosecute their innovators and let the Yakuza do whatever they want, and then sit around wondering why they can't get out of their own way.
    What everyone misses is that the US innovates like mad. You use Google and Facebook and Apple tablets and Android phones that compete with iphones from Apple and then you use laptops with Microsoft Windows accessing Bloomberg and trading with TOS/IB/you name it on the NYSE/BATS/AMEX/NASDAQ/CME/CBOE/ICE commodities like corn (mostly grown in the US), wheat (the same), soybeans (the US and Brazil), or trade companies like, oh, GOOG/AAPL/MS/GLW/NDAQ or US born and bred ETF's like SPY/IWM/GDX/TLT while flying from place to place in Boeing jets and hedging with options that mostly have their markets made by folks in Chicago....

    .....and then say the US doesn't produce anything anymore.

    Then again, I should keep quiet, since if y'all began to get any of this, I might not have that 90% of losers to fund the market.
    So, carry on.