Monday, 9 February 2009

Stimulus: Because all economies have performance issues [update 2]

This year, Australian taxpayers will receive, from their Government, an Economic Stimulus Payment. A shopping subsidy. This is a very exciting new programme that can be explained using the Q and A format:

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government sends to taxpayers.

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. Only a smidgen.

Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a
High definition TV set or a new computer, thus stimulating the economy.

Q. But isn't that stimulating the economy of China?
A. Um.
Q: Well, how on earth does it stimulate the one whose taxpayers are paying to be stimulated?
A: It's all about the "multiplier."
Q: The "multiplier"?
A: Yes, the "multiplier." Every dollar the government "injects" into the economy creates an even larger increase in national output -- a multiple up to one-and-a-half times the original spend-up. The money the government is giving away goes to retailers, which then goes to producers, which then goes to other producers and so on. The net result of the spend-up, as the theory goes, will be new jobs and an overall increase in the nation's income.

Q: So the government is giving me back a smidgen of my own money, and this smidgen is multiplied several times to create a "stimulus?
A. You've got it.

Q: And it keeps prices up?
A: We hope so.

Q: But don't prices need to fall in a recession to get real production going again?
A: Well, yes.

Q: And it's not even backed by real demand, is it?
A: Well, no.

Q: So how long can such an artificial stimulus last, then?
A: Um, the theory is that it's only temporary at best.

Q: And what sort of stimulus would it have created if I'd been able to keep that money myself, and either spend it or save it?
A: Well . . .

Q: Or if producers had been able to keep their own money?
A: Um . . .

Q: So it would be fair to argue that "not only does the increase in government outlays not raise overall output by a positive multiple; but, on the contrary, [it actually] leads to the weakening in the process of wealth generation in general.”
A: But . . .

Q: And this is the whole theory? This is all you economists can come up with?
A: Well, that's about it, yes.

Q: So it's a bit like when "a carnival magician produces a quarter from behind a child's ear," isn't it. "The 'magic' of the multiplier is mere illusion."
A: Hush your mouth. People are listening.

Q: No answer?
A: Sorry, we're a bit busy right now shovelling money out the door.

* * * * Stimulus: Because all economies have performance issues * * * *

[Hat tip (and pic) Tim Andrews & Sus]

UPDATE 1: Courtesy of Greg Mankiw [with a hat tip to Anti Dismal], here is John Maynard Keynes of 1942 six years after The General Theory, showing he was still wrong about his general theory, but moving towards being right on specifics:
Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.
UPDATE 2: Subsidies for everyone? If we all have to endure the "stimulus" packages of politicans, then how about a stimulus package for bloggers? The excellent 14-point case for prudent profligacy [hat tip TVHE] concludes,
This is an important campaign. Your comments of support ... help make the case to government...
With sufficient momentum we can make sure the stimulus is not wasted on filling in freshly dug holes, fixing the environment or building bridges to nowhere - all things that the market is perfectly capable of doing by itself. Instead of Bridges to Nowhere, what this economy really needs is a serious infusion of Blogs about Nothing.
Amen to that. May I forward you this humble blogger's bank account details? ;^)

1 comment:


    Economists including a RBA board member calling for the $42b bailout to be scrapped claiming it to be only a temporary boost to the economy that will likely end up in pokie machines and plasma TVs.. Calling for tax cuts to be brought forward and a temporary cut to GST.

    Better than most of the news going around Oz at the moment.


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