The author of the attached article is another in the long line of Republican and "conservative" authors and speakers, including several members of the United States Congress, claiming that the economic recovery package passed by Congress is a "spending bill," but not a "stimulus bill." As Steve Pearlstein pointed out in a recent column in the Washington Post, spending and stimulus are the same thing. Let me repeat that: Spending and stimulus are the same thing.
The economy, quite simply, is the sum total of the demand for goods and services in a given time period. If you increase spending, you increase demand for goods and services, that is, you increase the amount of economic activity. And increasing an activity may be said to stimulate it. I think these Republicans know that, I think even the dimmest of them know that spending is stimulus, and stimulus is spending. So I must conclude that they don't like what the money is being spent on, not whether it is stimulative or not.
It is well-known that the Republicans prefer tax cuts. But tax cuts are not, in and of themselves, stimulative. Tax cuts mean that disposable income is increased, but they don't necessarily motivate people to spend that increase. Whereas spending, spending on anything, is at least initially stimulative, in that it increases the demand for whatever the government is spending the money on.
Let me note that all dollars are equal. If I take $100,000 and pay it to a small businessman to upgrade the insulation in an office building, I'm giving that businessman money, and he will spend it, and that will stimulate the economy. If the insulation is already on hand, and he takes a big chunk of the money to pay down his debt, by that amount we get less additional demand. If I take the same $100,000 and use it to pay the salary of a teacher or a policeman, or pay it to a construction firm, or use it to buy a van for a senior citizens' program, the portion of that $100,000 spent on additional goods and services is stimulative, and the portion used to pay down debt is not. And the same would be true of a $100,000 tax cut.
There are two exceptions, which apply equally to spending and to tax cuts. If I give $100,000 to a couple who are in over their heads on a mortgage, and they use the $100,000 to pay down that mortgage so that they can afford the monthly payment, no new goods or services were generated, and $100,000 was destroyed. (The creation of debt is the creation of money; the payment of debt is the destruction of money.) If I give $100,000 to a couple, and they go out to the Mercedes dealer and buy a new Mercedes for $100,000, and the dealer does not order a new Mercedes to restock his inventory, then no new goods or services were generated. The amount of the dealer's commission will be stimulative, and any money spent on dealer prep and so on, but the car already existed, so buying it doesn't create additional economic activity.
Glenn A Knight
In my study
Sunday, February 15, 2009
Subscribe to:
Post Comments (Atom)
4 comments:
Glenn:
We could provide money to the Army to recruit another 10,000 soldiers and then have them march around on a base and paint rocks. It would cost money and, according to your post therefore be "stimulus". I think the Republican position (or mine, at any rate) is that such money would be wasted compared with what the money would be doing were it left in the possession of the citizenry to spend as they see fit.
Also, while a couple paying off their mortgage would not be "stimulus" it seems to me from a social, moral, and long-term wealth creation point-of-view, it would be far better to let that couple pay that mortgage (and thereby increase their net wealth) rather than take their mortgage money away from them and use it to pay young men to put on uniforms, march and paint. The couple earned the money after all – or they wouldn’t have any to tax away – and I’m not sure what the benefit is of extra soldiers.
Perhaps the payment of debts is the "destruction of money" according to some formulas but the payment of debt for a piece of real property is an increase of net wealth for the person that owns the property.
Further, if I have, say, credit card debt that I am currently servicing I agree the mere payment of that debt doesn’t do much for the economy – in the unlikely event that we wish to consider debt defaults to be a good thing – but if I can pay that debt more quickly I will then have that monthly amount I was using for debt service once again available for new spending.
I’m not sure all dollars are equal if we are also concerned with (and we are) what behavior they pay for, and where they take us as a society. I think it is perfectly reasonable to highlight the difference between something we can all agree is worthwhile "stimulus" and what one could fairly describe as being mere government spending.
Regards,
Zabeli
There are several problems swimming around in there, Agim. Let me try to break out and address a couple of them.
The example of the Army is well-chosen. The military is totally non-productive. It is consumption, pure and simple. It uses stuff up. And, in fact, there is an argument that the size of our military is really based on our need to have a lot of people getting paid, who aren't producing stuff that would soak up the money. In other words, the U.S. military is a continuing stimulus package, the "flywheel of the economy."
Second, aren't soldiers and their families citizens? If we give money to the Army to recruit 10,000 soldiers, and they pay those soldiers, and the soldiers and their families spend that money, then you have about 25,000 citizens who are spending money as they see fit - that they couldn't spend before, because they didn't have it.
See, it doesn't matter who spends the money, in terms of its stimulative effect. Taxing the money from some rich guy who might just let it sit in the bank, and giving it to some poor schlump who will definitely spend it, is stimulative.
Here's another problem. You are absolutely right that it is a good thing, from the point of view of the individual household, to get out from under some of that debt. There is way too much debt out there, too many people are in over their heads, and we, as a country, need to pay down some of that debt.
However, if a lot of us all choose to pay down our debt instead of buying new stuff, the aggregate demand for new stuff goes way down. Then the guys who make the new stuff lose their jobs.
You are also quite right that how we spend the money may make a difference in various ways to our society. But in terms of economic stimulus, a dollar spent is a dollar spent.
I'm not sure why you say "mere government spending." The government's money spends just like everyone else's. The government spends money, individual households spend money, and businesses spend money. Either they spend it in salaries and wages, in which case the individuals who receive it either spend it or save it, or they spend it for goods and services, in which case the vendors turn around and pay their employees and suppliers.
Here's a simple example. It makes absolutely no difference if Citigroup builds a new bank building in your town at at cost of $10 million; if the U.S. Department of Justice builds a new U.S. Courthouse at a cost of $10 million; or if a development company spends $10 million building 20 tract mansions. It also doesn't matter whether those expenditures come out of income or borrowing. Money is fungible. $10 million in new economic activity is $10 million in new economic activity.
However, the bank building will be used to carry on banking business, making loans, handling deposits, and so on. It might employ 25 people. The courthouse will be used to conduct trials and hearings, for attorneys to plan their cases, and for a variety of public services. It might employ 40 people. The 20 tract mansions are non-productive assets. They don't bring in any money, and they don't provide a lot of employment. Over time, as the owners pay off their mortgages, the initial economic boost from that construction is damped out.
Here's the thing, Agim: There are productive and non-productive uses of money, and there are uses of money that have a bigger economic impact than other uses. But those differences don't depend upon whether the money is spent by private individuals, by corporations, or by governments. They depend upon the actual uses to which the money is put.
Glenn:
I still seem to be missing something. If the argument is merely the assertion of a definition - that all government spending is stimulus - then how is the "stimulus package" anything other than just a regular, plain, old spending plan?
I thought the entire point of the "stimulus" plan was that this was some super-smart emergency plan that would kick-start the economy in ways that normal government spending would not. That was certainly the position of the administration and the congressional majority party.
If there is nothing special about this sort of spending then how are the Republicans wrong to point out the plan is just a plain, old spending plan?
The point you're missing, Agim, is that the Republicans are trying to assert that there could be some kind of stimulus plan that would not be a spending plan. That's simply not true. And I think President Obama has been quite clear that this stimulus plan is a spending plan.
The main difference between this and any other spending bill is that this is a very large spending bill, putting money into projects and programs that would normally not get this kind of money. By targeting the spending to certain recipients, the government hopes to stimulate them to spend more, and to gain a multiplier effect.
Post a Comment