Deficit Spending

[WorldTraveller]

It's a simple and short read. Only a few pages.

 

Fed policy has aggravated, rather than ameliorated our basic problems because it has encouraged an unwise and debilitating buildup

of debt, while also pursuing short term policies that have increased inflation, weakened economic growth, and decreased the standard of living. No objective evidence exists that QE has improved economic conditions. Even before the Japanese earthquake and weather related problems arose this spring, real economic growth was worse than prior to QE2. Some measures of nominal activity improved, but these gains were more than eroded by the higher commodity inflation. Clearly, the median standard of living has deteriorated.

W

hen the Fed diverts attention with QE, it is possible to lose sight of the important deficit spending, tax and regulatory barriers that

are restraining the economy’s ability to grow. Raising expectations that Fed actions can make things better is a disservice since these hopes are bound to be dashed. There is ample evidence that such a treadmill serves to make consumers even more cynical and depressed. To quote Dr. Cochrane, “Mostly, it is dangerous for the Fed to claim immense power, and for us to trust that power when it is basically helpless. If Bernanke had admitted to Congress, ‘There’s nothing the Fed can do. You’d better clean this mess up fast,’he might have a much more salutary effect.”

Instead, Bernanke wrote newspaper editorials, have speeches, and appeared on national television taking credit for improved economic conditions. In all instances these claims about the Fed’s power were greatly exaggerated.

 

 

 

 

In the broadest sense, monetary and fiscal policies have failed because government financial transactions are not the key to prosperity.

Instead, the economic well-being of a country is determined by the creativity, inventiveness and hard work of its households and individuals.

 

http://www.hoisingtonmgt.com/pdf/HIM2011Q2NP.pdf

 

Interesting take

[Park]

Of course they do. The country was founded upon the public debt. Hamilton lifted the country out of a major depression by creating the good faith and credit of the nation, paying off the states revolutionary war debts and allowing for domestic and foreign credit to flow through the new United States. How can this even be a serious question?

[B-Large]

Deficit Spending makes sense in downturns. The difference is we never pay our deficit spending back in the good times, we simple add on additonal outlays and costs. That is exaclty why people do not want to pay more taxes until the Government proves it will not spend that next marginal dollar of revenue...

[WorldTraveller]

I'm not a believer in absolutism, I don't usually see things from a black or white lens, I happen to believe there are many shades of grey in between. Point being that I believe in some cases deficit spending makes sense, in others I believe less so. However what is more important is how that money is spent, if you are spending money simply to add aggregate demand to the economy that has no lasting impact in an economy with many structural deficiencies, then its akin to flushing money down the toilet, except that you have to pay interest on that money and in some cases brings you that much closer to facing a debt disaster.

 

If you have an economy that has your run-of-the-mill downturn, then yeah, adding a little demand to the economy, with the caveat that it efficiently and sufficiently does add demand to the economy relative to the amount spent, would make sense to me. But in this latest downturn, there were so many inefficiencies with this Stimulus Bill, that it was almost a complete waste. Proof is in the pudding, look at the economy, ever since the sugar high of the stimulus wore off, we've been steadily trending down. Reason being, because we never addressed our structural labor market woes.

[B-Large]

I'm not a believer in absolutism, I don't usually see things from a black or white lens, I happen to believe there are many shades of grey in between. Point being that I believe in some cases deficit spending makes sense, in others I believe less so. However what is more important is how that money is spent, if you are spending money simply to add aggregate demand to the economy that has no lasting impact in an economy with many structural deficiencies, then its akin to flushing money down the toilet, except that you have to pay interest on that money and in some cases brings you that much closer to facing a debt disaster.

 

If you have an economy that has your run-of-the-mill downturn, then yeah, adding a little demand to the economy, with the caveat that it efficiently and sufficiently does add demand to the economy relative to the amount spent, would make sense to me. But in this latest downturn, there were so many inefficiencies with this Stimulus Bill, that it was almost a complete waste. Proof is in the pudding, look at the economy, ever since the sugar high of the stimulus wore off, we've been steadily trending down. Reason being, because we never addressed our structural labor market woes.

 

Nor took into account the nation's housing issue. A highly illiquid mess like the housing bust was not going to be fixed with stimulus, and still lags today.

[Rob's House]

It's actually quite obvious that it does not. People tend to bypass the fundamentals and let the sheer size of our society and economy confound their common sense. First off, if this were the case, all the countries drowning in debt would have booming economies. The reason it doesn't work is because it takes production out of the economy rather than putting it in. This is why supply is the key to growth.

 

Here's an illustration even Park might be able to follow, although I doubt it. Let's say I have a chicken and you want eggs. My chicken only produces one egg per day regardless of how much money you throw at me (demand), if I get another chicken I can sell more eggs for a cheaper price because the marginal cost of maintaining another chicken is less than twice the cost of maintaining the first chicken and therefore my average cost of production per egg is less and I'm producing twice as many eggs (supply). So by increasing the supply there is now more wealth in the economy and those who demand eggs can get them more affordably.

[B-Large]

It's actually quite obvious that it does not. People tend to bypass the fundamentals and let the sheer size of our society and economy confound their common sense. First off, if this were the case, all the countries drowning in debt would have booming economies. The reason it doesn't work is because it takes production out of the economy rather than putting it in. This is why supply is the key to growth.

 

Here's an illustration even Park might be able to follow, although I doubt it. Let's say I have a chicken and you want eggs. My chicken only produces one egg per day regardless of how much money you throw at me (demand), if I get another chicken I can sell more eggs for a cheaper price because the marginal cost of maintaining another chicken is less than twice the cost of maintaining the first chicken and therefore my average cost of production per egg is less and I'm producing twice as many eggs (supply). So by increasing the supply there is now more wealth in the economy and those who demand eggs can get them more affordably.

 

That works fine as long as the neighbor can still afford to/ desires to purchase your egg. Maybe food is a bad anolgy here because people have to purchase food... perhaps the anaolgy should be TV's, cars, or some other consumable that people in a recession would cut back on.... I am still buying food no matter what, but when I get a windfall of money in my pocket I made a conscious choice to purchase a TV, or maybe not.

[Park]

It's actually quite obvious that it does not. People tend to bypass the fundamentals and let the sheer size of our society and economy confound their common sense. First off, if this were the case, all the countries drowning in debt would have booming economies. The reason it doesn't work is because it takes production out of the economy rather than putting it in. This is why supply is the key to growth.

 

Here's an illustration even Park might be able to follow, although I doubt it. Let's say I have a chicken and you want eggs. My chicken only produces one egg per day regardless of how much money you throw at me (demand), if I get another chicken I can sell more eggs for a cheaper price because the marginal cost of maintaining another chicken is less than twice the cost of maintaining the first chicken and therefore my average cost of production per egg is less and I'm producing twice as many eggs (supply). So by increasing the supply there is now more wealth in the economy and those who demand eggs can get them more affordably.

Ya Rob, you are pretty much a retard.

[B-Large]

Ya Rob, you are pretty much a retard.

 

do you ever respond with substance, or present any ideas that would prompt interesting debate?

[WorldTraveller]

do you ever respond with substance, or present any ideas that would prompt interesting debate?

Shut up you right-wing fact hating retard

 

/Park

[B-Large]

Shut up you right-wing fact hating retard

 

/Park

 

 

your forgot racist you stupid !@#$.... all racists

[Rob's House]

That works fine as long as the neighbor can still afford to/ desires to purchase your egg. Maybe food is a bad anolgy here because people have to purchase food... perhaps the anaolgy should be TV's, cars, or some other consumable that people in a recession would cut back on.... I am still buying food no matter what, but when I get a windfall of money in my pocket I made a conscious choice to purchase a TV, or maybe not.

You're looking too deeply into this. It's not intended to illustrate the economy at large, but rather a simple example that shows why supply, and not demand, is the key factor in growth.

 

Ya Rob, you are pretty much a retard.

Coming from you I'll take that as a compliment.

[WorldTraveller]

It's actually quite obvious that it does not. People tend to bypass the fundamentals and let the sheer size of our society and economy confound their common sense. First off, if this were the case, all the countries drowning in debt would have booming economies. The reason it doesn't work is because it takes production out of the economy rather than putting it in. This is why supply is the key to growth.

Generally speaking, I would say history would agree with you, and the point that you make regarding deeply indebted nations and their growth rates would support your thesis. However, I don't believe you can make a definitive case that ALL keynesian demand side economics fails. Think of it like this, if you are a businessman, and you need to take out a loan from the bank so you can start your business, there is a possibility that as a result from that loan that there will be a multiplier effect. That those funds that you borrowed multiplies into more funds, helping allowing your business to grow and prosper. The key however is for those funds to be applied properly, intelligently and most importantly efficiently.

 

Same example can be applied to government. The problem is that in most cases government is inefficient and government tends to mismanage money. It could be compared to an individual businessman who takes a loan from the bank, but just happened to mismanage his loan, therefore digging himself into a deeper hole.

[TakeYouToTasker]

Generally speaking, I would say history would agree with you, and the point that you make regarding deeply indebted nations and their growth rates would support your thesis. However, I don't believe you can make a definitive case that ALL keynesian demand side economics fails. Think of it like this, if you are a businessman, and you need to take out a loan from the bank so you can start your business, there is a possibility that as a result from that loan that there will be a multiplier effect. That those funds that you borrowed multiplies into more funds, helping allowing your business to grow and prosper. The key however is for those funds to be applied properly, intelligently and most importantly efficiently.

 

Same example can be applied to government. The problem is that in most cases government is inefficient and government tends to mismanage money. It could be compared to an individual businessman who takes a loan from the bank, but just happened to mismanage his loan, therefore digging himself into a deeper hole.

Does all spending (investment) generate profits (growth)?

[Rob's House]

Generally speaking, I would say history would agree with you, and the point that you make regarding deeply indebted nations and their growth rates would support your thesis. However, I don't believe you can make a definitive case that ALL keynesian demand side economics fails. Think of it like this, if you are a businessman, and you need to take out a loan from the bank so you can start your business, there is a possibility that as a result from that loan that there will be a multiplier effect. That those funds that you borrowed multiplies into more funds, helping allowing your business to grow and prosper. The key however is for those funds to be applied properly, intelligently and most importantly efficiently.

 

Same example can be applied to government. The problem is that in most cases government is inefficient and government tends to mismanage money. It could be compared to an individual businessman who takes a loan from the bank, but just happened to mismanage his loan, therefore digging himself into a deeper hole.

I don't put much stock in the multiplier theory, and I agree with you that borrowing money can be productive. My argument is not that borrowing for investment purposes is necessarily counterproductive, I'm saying that government spending to create demand is counter-productive.

[WorldTraveller]

Does all spending (investment) generate profits (growth)?

I'm not a big proponent of keynesian demand side economics, my argument is that there is no definitive outcome. It all depends in how wisely the money is spent, if it is for the simple fact just to create short-term demand that has little to no sustaining impact, then I would say no.

 

I don't put much stock in the multiplier theory, and I agree with you that borrowing money can be productive. My argument is not that borrowing for investment purposes is necessarily counterproductive, I'm saying that government spending to create demand is counter-productive.

If it's sole purpose is to create demand, with no lasting impact, then I agree.

[ieatcrayonz]

 

Here's an illustration even Park might be able to follow, although I doubt it. Let's say I have a chicken and you want eggs. My chicken only produces one egg per day regardless of how much money you throw at me (demand), if I get another chicken I can sell more eggs for a cheaper price because the marginal cost of maintaining another chicken is less than twice the cost of maintaining the first chicken and therefore my average cost of production per egg is less and I'm producing twice as many eggs (supply). So by increasing the supply there is now more wealth in the economy and those who demand eggs can get them more affordably.

I'm not buying this because you need a chicken to produce an egg which means the chicken has to sit on the egg to produce another chicken which means production slows. And having a chicken confuses the situation as to whether you have an egg or which one should come first. If the government buys you a chicken then the confusion lessens and production can begin. If not you have to decide which should come first, the chicken or the egg.

[Rob's House]

If it's sole purpose is to create demand, with no lasting impact, then I agree.

Pump priming doesn't have a great track record, and making defecit payments to either create demand or pay the bills doesn't create growth. The only scenario I can see where it would be productive would be the rare situation where a government project is necessary to facilitate business (like building a canal) and for some reason those who would utilize it are too numerous and unable to work together to build it.

[TakeYouToTasker]

I'm not a big proponent of keynesian demand side economics, my argument is that there is no definitive outcome. It all depends in how wisely the money is spent, if it is for the simple fact just to create short-term demand that has little to no sustaining impact, then I would say no.

How well does our government do at generating a profit (running a surplus)?

[Rob's House]

I'm not buying this because you need a chicken to produce an egg which means the chicken has to sit on the egg to produce another chicken which means production slows. And having a chicken confuses the situation as to whether you have an egg or which one should come first. If the government buys you a chicken then the confusion lessens and production can begin. If not you have to decide which should come first, the chicken or the egg.

I see. It all makes sense now.