As the recession has deepened, many of our economists (namely Krugman, Summers and the like) and elected officials have continuously argued that given the current dire circumstances, the only way to get the economy going is for the government to create demand by spending. The logic is that in a recession, the problem is that we have underconsumption; the magic pill for increasing consumption is government spending, generally in the form of public works projects. If resources like laborers are sitting on the sidelines (having been laid off), why not employ them in jobs building tangible public goods, enabling them to earn a living? Then, the government-spending multiplier will kick in, and the economy will grow again.
Robert Murphy in his refreshingly simple but thorough manner goes about picking apart the Keynesian argument in a recent Mises article. Murphy neatly sums up the Krugmanite point that “putting unemployed resources to work can only help, since prodding workers into producing even items of dubious value is better than letting them sit around watching Let’s Make a Deal.” He cites blogger Mark Thoma’s drawn-out explanation of the logic here. In debunking the Keynesian “idle resources” thesis, Murphy notes,
Even on its own terms, Thoma’s scenario fails because it is unrealistic. It is absurd to think that the government could come up with spending programs that would draw only on unemployed resources. Keynesian “macro” thinking ignores the complex capital structure of an economy. To build a bridge (as in Thoma’s example) requires a lot more than cranes and generic laborers. For example, gasoline will be burned in order to transport the newly employed workers to and from the work site. Nails, screws, steel, lumber, and other resources will be channeled into the new bridge, and at least some of these inputs will be diverted away from other private-sector uses, rather than simply leaving a state of idleness. Within the broad category of “labor” we find a similar situation, once we actually contemplate doing this project for real. If the city of Houston wants to build a new bridge, is it really the case that every last person even remotely involved with the project, will come from the ranks of the unemployed who are within commuting distance of the Houston bridge site? Surely the project will draw on engineers, construction foremen, and other skilled workers, who were still gainfully employed even amidst the recession, and who therefore will not be able to work on as many private-sector projects as they otherwise would have.
This issue is essential to understanding the way that the economy works. As I have mentioned before, no bureaucrat can ever plan for productive economic activity because he lacks the specialized knowledge, the ability to coordinate the activities and the profit motive of the business people who provide goods and services. He does not understand the capital structure of the economy. In the end, his central planning as always will fail.
As Murphy notes however, the Krugman’s of the world admit that during downturns, government spending is not about generating efficient economic activity, but rather acting on the assumption
that normal rules don’t apply. Ordinarily we’d welcome an increase in private saving; right now we’re living in a world subject to the “paradox of thrift,” in which private virtue is public vice. Normally we want to be careful that public funds are spent wisely; right now the crucial thing is that they be spent fast. (John Maynard Keynes once suggested burying bottles of cash in coal mines and letting the private sector dig them up — not as a real proposal, but as a way of emphasizing the priority of supporting demand.) [Emphasis added]
I just cannot understand this logic that when things get bad, somehow the laws of economic do not apply anymore. If the government can be so productive in using resources when times are bad, why not use resources when times are good as well? Can a country not prosper without a government boost? As we have seen, this is patently false given the success of all of the nations that have shed the yoke of socialism. Just look at Eastern Europe. In addition, if we as individuals were in financial trouble, would we spend money fast, or be careful in how we spent our funds, if we spent them at all? The same logic that applies to a man applies to the nation. During rough economic times, we need to ENCOURAGE SAVINGS, CUT SPENDING AND LOWER ALL BARRIERS TO POSITIVE ECONOMIC ACTIVITY (NAMELY TAXES). This will pave the way for real economic growth when the market corrects.
Murphy goes on to explain to the recalcitrant Keynesians that it is important to remember how we got into this situation, if we are to figure out the best way out of it. As Murphy puts it, following the low-interest-rate-fuelled boom, which created a mirage of wealth-generating activities ending in bust,
Once people in the private sector realized they had made horrible decisions during the boom years, they needed to stop business as usual and figure out how to make the best of a bad situation. Homeowners who had skimped on their savings for years (relying on booming house prices) had to slash spending to compensate for years of overconsumption, while entrepreneurs needed to decide which activities were likely to be profitable going forward, in light of the new information.
What had to happen is that workers and other resources that had been misallocated into housing construction and Wall Street investment banks, needed to be moved into other sectors. To repeat, this was and is a fantastically complex reshuffling, because even something as simple as producing a pencil requires the contributions of thousands of workers all over the world.
It’s not a simple matter of moving unemployed builders and hedge-fund managers into “booming” sectors X, Y, and Z, because (as we’ve seen above) these newly employed workers will require complementary tools and resources that were not laid off to the same extent. So the issue is, what is the best new outlet for all of these laid-off workers, such that — all things considered — the final mix of output goods best satisfies consumer desires? How can we be sure that channeling them into occupation X won’t actually do more harm than good?
This Austrian analysis of the problem shows that there was a major misallocation of resources that need to be channeled into productive sectors. However, the government is not the best authority to determine how to do this. According to Murphy,
In practice, the people in a market economy solve this fantastically complex problem by making profit-and-loss calculations, which in turn rely on market prices. For example, it is clear that a former Wall Street quant isn’t doing anybody a service by cranking out models that give mortgage-backed securities a gold star for safety. But what should this PhD do now? Should he go into academia and teach thermodynamics (which may very well have been the subject of his dissertation)? Or is his impressive education really a complete waste, and he would — at this point, given the economic realities — provide the most service by working the register at Wal-Mart?
Nobody knows the answer to this question. What happens during the recovery process is that the unemployed whiz kid initially looks for a job paying his former salary. As the months pass, he realizes that this is unrealistic, and he begins lowering his minimum price. Eventually, he finds an employer with compatible desires, and the two agree to a mutually beneficial arrangement.
Imagine that, letting the markets sort out the problems brought about by the government-created boom-and-bust cycle. Murphy notes that the Keynesians are wrong to assume that it is simply an issue of scared consumers causing the economy to contract. He argues:
On the contrary, the economy’s capital structure really was thrown into an unsustainable condition during the boom years, and it takes time for the mess to be sorted out. When the government runs up a deficit to fund “stimulus” projects, all that really means is that it is forcing taxpayers to pay for projects that they wouldn’t buy with their own money.
This is an aspect of the stimulus that really makes my blood boil. If it isn’t bad enough that the government is going to use precious resources inefficiently, and prolong the market-based recovery needed to start real economic growth again, the taxpayers funding these projects also don’t have really any say in them. Sure, we can vote out our elected officials. But as we have seen with all of the bailouts and the TARP money, even when sizable amounts of the populace have opposed government policies, we have not been able to stop them. It is immoral that the politicians can determine how best to use our hard-earned cash, and how much to burden our future generations with debt for these false stimuli. Let’s hope that we can not only vote out the bums during the midterm elections, but supplant them with people that have a sound understanding of economics and the Constitution.
As some of you may have seen recently, details of specific projects to be carried out under Mr. Obama’s stimulus plan have been trickling out into the media (transparency from the government for a change). One of the projects gaining perhaps the most notoriety is a plan to transform the humble town of 194, Edwardsville, Alabama into “a cutting-edge demonstration project for energy sustainability and a hub for tourism.” The bold new project comes replete with “a renewable energy museum, scenic railroad, and vineyards.” The asking price for the project? $375 million, or approximately $2 million per resident.
If this does not sound terrific enough, wait till you hear the details on some of the proposals that go into the package:
Along with the more traditional proposals to replace streetlights with solar-powered lights (cost: $3,479,200), to install solar panels on the town hall (cost: $77,000), and to build solar-powered recharging stations for electric golf carts and vehicles (cost: $620,000), Edwardsville and Talladega Springs have assembled a set of even more far-reaching projects.
An outlay of $50.4 million, for example, would go toward installing water pipelines beneath roads to soak up the sun’s rays, transferring heat. That technology is currently being used in the Netherlands, which found that while the cost of installation was double that of normal gas heating, the system halved the amount of energy required.
One of Edwardsville’s biggest proposed expenditures is for a “renewable energy museum and information dissemination center.” Phillips envisions exhibits, audio tours, seminars, a research center, and a satellite lab run by the National Renewable Energy Laboratory. To fund the museum, Edwardsville is requesting $32.1 million.
The energy museum speaks to Edwardsville’s larger hope: becoming a tourist destination. The town has requested $37 million for a solar energy-enhanced “scenic railroad line.” It’s also asking for $9 million to go toward establishing an eventual 640 acres of vineyards, 160 acres of which would be launched first. Each of the four vineyards would be designed around the theme of a different European country and, in a bid for weddings, dotted with gazebos and chapels.
Now before we rush to judgment, there are a few things we must keep in mind. First, these projects would not just be serving Edwardsville, but a region of a robust 80,000 people. For perspective, this is just greater than the amount of people in one square mile (70,595) of Manhattan. All 80,000 will get to enjoy the beautiful new vineyards. Second, given Edwardsville’s poverty level (28.7% were below the poverty line according to the 2000 census), as E.D. Phillips, town representative to the U.S. Conference of Mayors notes, “Do you know how hard it is to fund some of these projects when your tax base is so low? So we just breathed this sigh of relief when we found out about the stimulus package . . . especially when it had a focus on renewable energy.” After all, green energy will solve your third-world poverty levels. Third, regarding the efficacy of the museum, according to Ford Bell, President of the American Association of Museums, just because a museum is rural does not mean it will be a failure, with Ford pointing to the success of a living history museum in Fishers, Ind. Quite the ringing endorsement, and might I add a lovely museum.
In all honesty, I don’t even know where to begin. In my wildest dreams I could never have envisioned a project like this. It seems like something out of the Onion. But it’s not. This is a real plan that could potentially be enacted by our soon-to-be-president Obama. As Mr. Obama noted in his most recent speech on the ironically named “American Recovery and Reinvestment Plan,”
It is true that we cannot depend on government alone to create jobs or long-term growth, but at this particular moment, only government can provide the short-term boost necessary to lift us from a recession this deep and severe…That’s why we’ll invest in priorities like energy and education; health care and a new infrastructure that are necessary to keep us strong and competitive in the 21st century. That’s why the overwhelming majority of the jobs created will be in the private sector, while our plan will save the public sector jobs of teachers, cops, firefighters and others who provide vital services.
To finally spark the creation of a clean energy economy, we will double the production of alternative energy in the next three years. We will modernize more than 75 percent of federal buildings and improve the energy efficiency of two million American homes, saving consumers and taxpayers billions on our energy bills. In the process, we will put Americans to work in new jobs that pay well and can’t be outsourced—jobs building solar panels and wind turbines; constructing fuel-efficient cars and buildings; and developing the new energy technologies that will lead to even more jobs, more savings, and a cleaner, safer planet in the bargain.
For the detractors, Obama notes:
I understand that some might be skeptical of this plan. Our government has already spent a good deal of money, but we haven’t yet seen that translate into more jobs or higher incomes or renewed confidence in our economy. That’s why the American Recovery and Reinvestment Plan won’t just throw money at our problems—we’ll invest in what works. The true test of the policies we’ll pursue won’t be whether they’re Democratic or Republican ideas, but whether they create jobs, grow our economy, and put the American Dream within reach of the American people…
Every American will be able to hold Washington accountable for these decisions by going online to see how and where their tax dollars are being spent. And as I announced yesterday, we will launch an unprecedented effort to eliminate unwise and unnecessary spending that has never been more unaffordable for our nation and our children’s future than it is right now.
We cannot have a solid recovery if our people and our businesses don’t have confidence that we’re getting our fiscal house in order. That’s why our goal is not to create a slew of new government programs, but a foundation for long-term economic growth.
That also means an economic recovery plan that is free from earmarks and pet projects. I understand that every member of Congress has ideas on how to spend money. Many of these projects are worthy, and benefit local communities. But this emergency legislation must not be the vehicle for those aspirations. This must be a time when leaders in both parties put the urgent needs of our nation above our own narrow interests.
We have already tried the wait-and-see approach to our problems, and it is the same approach that helped lead us to this day of reckoning.
That is why the time has come to build a 21st century economy in which hard work and responsibility are once again rewarded. That’s why I’m asking Congress to work with me and my team day and night, on weekends if necessary, to get the plan passed in the next few weeks. That’s why I’m calling on all Americans—Democrats and Republicans—to put good ideas ahead of the old ideological battles; a sense of common purpose above the same narrow partisanship; and insist that the first question each of us asks isn’t “What’s good for me?” but “What’s good for the country my children will inherit?”
More than any program or policy, it is this spirit that will enable us to confront this challenge with the same spirit that has led previous generations to face down war, depression, and fear itself.
Ok Mr. Obama, let’s talk about “What’s good for the country my children will inherit.” Based on your plan, my children are going to inherit a large deficit which they will be forced to pay down in direct taxes, high interest rates, and/or inflation, a government with a legacy of redistributing wealth to build green energy museums, scenic railroads and vineyards in small towns in Alabama and a strong “sense of common purpose.” My future children can feel safe in their impoverishment knowing that they share that fortune with millions of others with a “sense of common purpose.”
This particularly egregious example of government waste and reckless regard for the taxpayer accomplishes none of the lofty goals Mr. Obama strives for. Money is not being used for anything that I would call a “priority.” Certainly the money is not going towards saving “the public sector jobs of teachers, cops, firefighters and others who provide vital services,” nor does it seem to provide for “long-term economic growth.” What this plan does is reflect a perverse diversion of hard-earned, taxpayer money toward asinine green energy initiatives, a railroad that serves no rational purpose whatsoever and a vineyard that the US News article notes many characterize as “dubious”, given that “The Southeast is subject to a disease that puts traditional European grape varieties out of reach, usually limiting vineyards to the muscadine grape. Partly as a result, vineyards haven’t exactly been the region’s strong suit…Funding more than “a fraction of the scope” of neighboring states’ vineyards with public money, therefore, would distort the market, says Bill Nelson, president of WineAmerica, the National Association of American Wineries.” But at least the taxpayer will have the comfort of holding Washington accountable by being able to go “online to see how and where their tax dollars are being spent.” You mean we actually get to see how the government is spending the income they took from us too?
What this plan amounts to is a robbery of the citizens in so many respects. The government is robbing us of our hard-earned dollars for experimental green initiatives and building museums so people can study about a green ideology which basically follows a Rousseauean logic that leads us to reject industrialization and technological advancement, and sacrifice these goals for the sake of “saving the planet.” Now I don’t think that intentionally harming the environment is a great thing to do, but I also don’t think that we as humans were put on Earth to sacrifice ourselves by not making use of its resources. The government is robbing us of our dignity by taking the common citizen to be a fool in not realizing that these proposals are the exact earmarks and pet projects that it claims to be protecting us against, and using scare tactics that millions of jobs will be lost without these projects, and also in naively and disingenuously claiming it will grow our economy and “put the American dream within reach of the American people” while “getting our fiscal house in order” without “unwise and unnecessary spending that has never been more unaffordable for our nation and our children’s future than it is right now.” The government is robbing us of our freedoms because it allows itself to dictate the best ways to use our money, instead of allowing us, the people (who it’s supposed to represent I might add), to determine how we would like to dispense with our cash, if we choose to dispense with it at all. The government is robbing our future generations by adding staggering amounts to our already colossal debt. It is robbing us of our confidence by basing itself on the fallacious argument that in the short-term only government can provide the lift out of the recession, not private American citizens acting with a sense of entrepreneurial spirit, appetite for risk and belief in the individual. Essentially, it is robbing us of all of our G-d-given and Constitutionally-protected natural rights to our lives, our liberty and our property. Perhaps worst of all, it is robbing us of our trust.
In closing, one of my friends from Alabama had the following response to the article: “They just tarnished everything Senator Shelby has fought for during these past few months. Fu@#in’ redneck hippies.” My sentiments exactly.
So you thought that the trillion dollar stimulus might be carried out efficiently? As I have argued, this stimulus package is not going to help us at all, but rather serve as a diversion and probably disastrous use of private capital. However, adding in the “buy American” clause that the Democrats are advocating simply adds insult to injury. There are multiple issues with having this sort of clause. First, are funds going to be used effectively if they all must go to American companies? Will American goods and services be both the cheapest and highest quality for the public projects? Second, is the administration not asking for major issues with corruption, given that the government will be choosing what companies receive the contracts to carry out the projects?
Call me a pessimist but I see no way that this clause does the country any good. Chances are, funds will be used on worse and more expensive products, and politicians will hand the contracts for various goods and services out to favored constituents. Does this serve the public as a whole? Can any project created by politicians avoid ending up as mere pork, as Representative Von Hollen has argued? I just do not see any way that this stimulus can be productive, and adding in a “buy American” clause is simply going to give the taxpayers more grief.