Posted by: graemebird | January 25, 2009

Crowding Out Is 100%

Bruce Bartlett

Thus the argument really boils down to a question of timing. In the short run, the case for stimulus is overwhelming. But in the longer run, we can’t enrich ourselves by borrowing and printing money. That just causes inflation.

The trick is to front-load the stimulus as much as possible while putting in place policies that will tighten both fiscal and monetary policy next year. As terrible as our economic crisis is right now, we don’t want to repeat the errors of the past and set off a new round of stagflation.

For this reason, I think there is a better case for stimulating the economy through tax policy than has been made. Congress can change incentives instantly by, for example, saying that new investments in machinery and equipment made after today would qualify for a 10% Investment Tax Credit, and this measure would be in effect only for investments largely completed this year. Businesses will start placing orders tomorrow. By contrast, it will take many months before spending on public works begins to flow through the economy, and it is very hard to stop it when the economy turns around.”

 

This quote taken from rog at catallaxy. Here Bruce Bartlett has one principle right. But he would bugger up policy nonetheless. Since to get policy right you have to have the total understanding of the situation. And not just get the logic right on one principle alone. But congratulations to Bruce for applying straight logic anyhow. 

The problem with what Bruce is saying here is that he has been stooged into thinking that there is such a thing as a multiplier, that crowding out can be less than 100% for fiscal ill-rectitude, and that there is such a thing as fiscal stimulus. None of these propositions is true.

As a result of this misunderstanding, brought about by a combination of gutlessness and stupidity in the economics profession, Bruce actually believes that a valid response to a recession is to increase government spending now. This is totally wrong. Economic science rather demands that government spending be slashed with as much ruthlessness as can be applied, as many departments as possible be closed down and as many government people sacked as can be sacked and then sack some more and keep sacking. 

As to front-end-loading, the valid principle that we identified from Bruce as being merely Bruce applying straight logic to the situation, that front-end loading must come from monetary policy alone. And only from one aspect of monetary policy. From the immediate increase in monetary base.

The increase in monetary base must be very large. Since it has to counter the possible collapse of ponzi-money and at least part of the increase in the demand for cash for holding. But obviously such decisive action runs the risk of being inflationary down the track.

The answer is to bring in the reserve asset ratio at the exact same time as the massive injection of monetary base. The reserve asset ratio is set high enough, and the cash injection volumnous enough, such that the previous peak in Gross Domestic Revenue is narrowly beaten but then frozen in place. 

We call this front-end-loading BOUNCE AND FLATTEN and I’ve written about this earlier. If it had been applied at the time I demanded there would have been no risk of recession in Australia, and no need to guarantee the banks ponzi-deposits. There would have been no wealth transfer to the banks, and no chance of a bank run since the banks would have been awash with cash. 

Now people we have to get this right. Sorry for being nasty to Cato earlier. I thought it was Jason that had written the piece in total disregard of two years of threads of doom on monetary policy that had been forced upon me by the rampant denial of reason in the subject of monetary economics. 

Here are some of the links made last year when there was still time to avoid a lot of economic damage and rampant bank-welfarism.  This thread was written in May 2008. I knew what I was about. The central bank did not. 

Symptoms Of Recession From This Moment On/BOUNCE AND FLATTEN/The end of central bank mystique. « A Better World: Graeme Bird For High Office

Here is another one explaining what is going on. But as it turned out the GDP figure wasn’t negative though the private economy surely tanked.  The figures were held up I believe by growing parasitism. Which is a failing commentary on GDP as a measure of output. Since the extra parasitism hurt and did not help the private economy that was already under such desperate stress. 

GDP Figure Will Be Negative/For The Love Of Mercy Increase The Monetary Base Immediately « A Better World: Graeme Bird For High Office

Just to give you a quote as to just how decisive the action would have had to have been, and how powerfully one needed to adhere to Bruce Bartletts Principle of front-end-loading the action here is a quote from back then. That much cash was needed, as debt retirement, and combined with a reserve asset ratio high enough to stop a spending overshoot, combined also with moral suasion to get businesses to defer any payment of dividends, for individuals to try and save as much as they can, and for absolutely ruthless job cuts in the private sector was the prescription needed to crash tackle the impending recession and make ground. Here is the quote: 

“So the answer is to flush an extra 17.5 billion AUD into the monetary base, and at the same time set up a reserve asset ratio that will not allow the money supply to overshoot the previous high too much. ……”

SEVENTEEN AND A HALF BILLION DOLLARS IN EXTRA CASH IN THE ECONOMY. Thats a lot of extra cash I know. But thats what it would have taken. 

Now a little bit more on this crowding out business and the lie that is the multiplier. 

GDP equals C+I+G+X-M

But business expansion only comes out of something that is not included in the above. It comes out of business-to-business spending.

Hence no fiscal stimulus can ever be a good thing. What we are doing is trying to starve the economy of everything that ISN’T internal business spending. We are getting THE LEVEL of spending right as another important, but separate concern.

“Insofar as such crowding out from the first to the second best or even less use of the resources involved occurs, it is more likely to occur through government directed spending and creates more deadweight loss in the economy compared to a ’stimulus’ like tax cuts which are at least tracking private revealed preferences.” (J.Soon Catallaxy)

Crowding out begins at 100% and is never less then that. The alternate point of view is a belief that the resources were created from borrowing. But resources are created AND THEN BORROWED. So the theory that crowding out is ever less than 100% is superstition. Its voodoo. Its like bringing quantum theory voodoo into economics. The nominal spending is crowded out 100% if monetary considerations are taken out of the picture. But real crowding out must always be 100% plus as ones starting point for bewitched-like miracles not to have occurred. 

“Whatever your position on the multiplier (i think it could be as high as 0.8 at certain times) heres one critique of monetary policy as a solution.” (Cato at catallaxy)

The multiplier is not .8 Or 1.8, thinking of it in other terms. The multiplier is zero. Since crowding out is total the multiplier is zero. The illusion that there is a multiplier is a function of moving the spending from where it is useful in ending the recession, and yet is invisible to Keynesians, to where it is visible to Keynesians but useless at ending the recession. The idea of a multiplier is a borderline insane idea, that the rational man Cato has been desensitized to.

Because of the considerations above tax cuts must be judged on their own merits, spending increases are verbotten during recessions, and the key to getting out of recessions is fiscal triage. That is to say mass-sackings in the public sector and spending cuts that make people cry.  Tax cuts do not lead to nominal fiscal stimulus since there is no such thing as fiscal stimulus. But certainly if you can cut spending to such a great degree that you can also have tax cuts thats a winning scenario and with moral suasion to reduce prices, delay dividends, forget bonuses, save as much as possible, reduce debt, and have temporary wages and salary cuts (the bigshots as well) you will be out of recession in no time flat.

Since the idea is to increase the proportion of spending that is business-to-business-spending some tax cuts are better than others. Getting rid of taxes on retained earnings is critical. Any fees on business spending that aren’t strictly user pays have to go. So if we had a carbon tax that would have to be deep-sixed. Taxes on interest earnings must go. Because we want business to Since  spending on wages will be reduced in a recession no matter what then the payroll tax has to go. Moral suasion swapping a permanent increase in the tax-free-threshold in exchange for a temporary cut in wages and salaries would be helpful (though no compulsion ought be considered).

Now notice that our own guys are doing every damn thing wrong. They are working with fidelity to economic fallacies rather than economic science. They want to increase unemployment benefits. This will drain resources from business-to-business spending and will hold wages up at a time when we want to bring them down.  Unemployment benefits are enough to survive on so they ought not be raised.  There were other spending increases that were applied, supposedly as fiscal stimulus, that were not legitimate for fiscal stimulus (since there is no such thing) but were important for other reasons. It is true that some pensions needed to be boosted. They weren’t boosted enough. But this is nothing to do with fiscal stimulus, rather this is to do with decency. And in boosting these pensions what was needed also was two other measures. The increasing of the eligible pension age one day every two days that pass, so as to wean off pensions entirely over time, and as well the pension increase ought to have been paid for out of mass-sackings in the public sector. 

Now because there is no such thing as fiscal stimulus there is also no such thing as automatic stabilizers. Thats just another irrational lie that economic science dispenses with. Rather this increase in welfare payments, valid or not, causes further damage to the private economy and is part of a vicious circle. That this is the case highlights the importance of dealing with the situation with powerful urgency and ruthlessness. Since each day that these people are not working is a day when more damage is done.

Cato is still not getting it. And the problem is the rather spooky idea that nominal GDP does in fact equal nominal national income. This is an interesting mathematical artifact but for the most part it ought to be ignored. Let us see what Cato has to say:

i’m not supporting a fiscal stimulus. its just that it could be the case that a fiscal stimulus increases GDP. you can’t a priori rule out a situation where fiscal spending increases income YOU CAN AND YOU MUST. ALTHOUGH FISCAL SPENDING CAN INCREASE NOMINAL!!!!!!!! NATIONAL INCOME IT CANNOT INCREASE REAL NATIONAL INCOME. IT IS THE CASE THAT THE NATURAL WAY OF THINGS IS FOR NOMINAL INCOME TO FALL AS REAL INCOME RISES. THIS PART OF THE STORY IS COMPLICATED AND YOU WILL HAVE TO ASK FOCUSED QUESTIONS IF YOU WANT TO UNDERSTAND THIS RATHER COMPLEX ISSUE. you have to look at history. BUT WHEN YOU DO SO YOU HAVE TO BE ABLE TO APPLY THE VOODOO-FREE-ZONE PRINCIPLE.

“…now theres massive debate over the history. krugman has pointed out world war 2 where there was massive intervention, and the economy did grow (even though consumption dropped)

THE ECONOMY GREW BECAUSE OF MONETARY STIMULUS AND THE ABANDONMENT OF NEW DEAL POLICIES. FISCAL ILL-RECTITUDE IMPOVERISHED AMERICANS EVEN FURTHER THAN THE DEPRESSION DID. THAT THE ECONOMY GREW, HAD ABSOLUTELY NOTHING AT ALL TO DO WITH GOVERNMENT SPENDING. THIS WHOLE MISUNDERSTANDING ONLY SERVES TO HIGHLIGHT THE WEAKNESS OF GDP AS A MEASURE OF ECONOMIC ACTIVITY.

….. so the massive distortion was that there was a war. but look at the massive growth of the US production during and after this time.

MONEY POLICY ALONE AND THE EFFECT OF TRYING TO GET WAGES AND PRICES DOWN AS OPPOSED TO THE PRIOR IDIOTIC POLICY OF TRYING TO FORCE WAGES AND PRICES UP….

…. you can’t say that had no effect;

FISCAL WASTAGE HAD NONE OF THE EFFECT YOU ARE ASCRIBING TO IT…

…. it was a massive investment in manufacturing infrastructure and research that had some payoff, even though i don’t think the multiplier is above 1……..

THERE IS NO MULTIPLIER AT ALL. IN THIS CASE THERE WAS A MASSIVE INCREASE IN TOTAL SPENDING, BUT IT REVEALED ITSELF AS AN EVEN GREATER INCREASE IN GDP SINCE SPENDING WAS ALSO SHIFTED FROM WHERE THIS SPENDING WAS INVISIBLE TO GDP TO WHERE IT WAS NOW VISIBLE.

In summary above Cato is getting confused by two items. Firstly he is getting confused by the counter-intuitive and quite astounding reality that GDP is also a measure of national income. Or is equal to natiaonal income. But this equality to national NOMINAL income tells us nothing about real business recovery or REAL incomes.  And also he has come to his conclusions as a result of struggling through the paradoxes that incorrect and tendentious notions of national accounting throw up at us.  When viewed through the prism of Keynesian… bullshit….. national-accounting the fact that American GDP was 100 billion dollars one year and defense output alone was 100 billion the next year appears to be an unaccountable miracle and yet a reality that Cato feels he needs to acknowledge. He ought to rather ask me questions about it and there the mystery will end without him being beholden to a string of wrong conclusions. 

I want to state right here that unlike most other Catallaxians (CL, Fisk and Edwards excepted) Cato is a righteously-and- faultlessly rational individual, who is not often lead astray, and never through any nasty or flippant attitude to reason itself. Hayek had solved this particular riddle but in the most complicated way that was impenetrable to the lay person.  Austrian economics had solved this matter more generally also in favour of the policy prescriptions I have above. But the decisive and astoundingly clear solution to these matters, which makes these matters utterly unambiguous, and beyond all doubt came from our greatest living economist George Reisman. 

Terrific empirical follow-up work was done recently by the wonderful misean-affiiliated historian Robert Higgs. Unfortunately he performed this final nail in the coffin of the idea that war can stimulate production, without the aid of Reismans groundbreaking work, which would have greatly simplified the understanding of the research that Robert Higgs performed. 

 

 

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Responses

  1. Bird:

    Lets see you apologize to Jason for that unwarranted and incorrect attack. Man up and say you’re sorry so don’t be a wuss.

  2. You set the situation straight. Are the both of you (you too bootnigger) coming out against fiscal stimulus in all its forms?

    Now there are bailouts and bailouts. If there is a run on the bank I can send a literal truckload of cash around, charge 15%, and demand to open their books to check for illegality, send them to bankruptcy court and recoup the taxpayer for the sale of assets. Allow new players to come in buying one branch at a time.

    But both of you have stood up for outright daylight thieving in the past. The boot nigger has advocated it and Soon you have not disavowed it outright and strongly.

    So lets hear it from the both of you.

  3. See here, Bird. Why are you attacking Italians? Australians love Italians.

  4. I aint attacking any Italian but one. Thats the one that told you outright that the science is against the climate rationalists and for the climate alarmists but will not stick around to back this lying bootnigger talk up.

  5. This is something that must be understood and any lying notions backing up parasitism as the cure for parasitism must be sent to the fires. Always the response to a recession must be to close down bureaucracies by the bakers dozen.

  6. Cato is still not getting it. And the problem is the rather spooky idea that nominal GDP does in fact equal nominal national income. This is an interesting mathematical artifact but for the most part it ought to be ignored. Let us see what Cato has to say:

    i’m not supporting a fiscal stimulus. its just that it could be the case that a fiscal stimulus increases GDP. you can’t a priori rule out a situation where fiscal spending increases income YOU CAN AND YOU MUST. ALTHOUGH FISCAL SPENDING CAN INCREASE NOMINAL!!!!!!!! NATIONAL INCOME IT CANNOT INCREASE REAL NATIONAL INCOME. IT IS THE CASE THAT THE NATURAL WAY OF THINGS IS FOR NOMINAL INCOME TO FALL AS REAL INCOME RISES. THIS PART OF THE STORY IS COMPLICATED AND YOU WILL HAVE TO ASK FOCUSED QUESTIONS IF YOU WANT TO UNDERSTAND THIS RATHER COMPLEX ISSUE. you have to look at history. BUT WHEN YOU DO SO YOU HAVE TO BE ABLE TO APPLY THE VOODOO-FREE-ZONE PRINCIPLE.

    “…now theres massive debate over the history. krugman has pointed out world war 2 where there was massive intervention, and the economy did grow (even though consumption dropped)

    THE ECONOMY GREW BECAUSE OF MONETARY STIMULUS AND THE ABANDONMENT OF NEW DEAL POLICIES. FISCAL ILL-RECTITUDE IMPOVERISHED AMERICANS EVEN FURTHER THAN THE DEPRESSION DID. THAT THE ECONOMY GREW, HAD ABSOLUTELY NOTHING AT ALL TO DO WITH GOVERNMENT SPENDING. THIS WHOLE MISUNDERSTANDING ONLY SERVES TO HIGHLIGHT THE WEAKNESS OF GDP AS A MEASURE OF ECONOMIC ACTIVITY.

    ….. so the massive distortion was that there was a war. but look at the massive growth of the US production during and after this time.

    MONEY POLICY ALONE AND THE EFFECT OF TRYING TO GET WAGES AND PRICES DOWN AS OPPOSED TO THE PRIOR IDIOTIC POLICY OF TRYING TO FORCE WAGES AND PRICES UP….

    …. you can’t say that had no effect;

    FISCAL WASTAGE HAD NONE OF THE EFFECT YOU ARE ASCRIBING TO IT…

    …. it was a massive investment in manufacturing infrastructure and research that had some payoff, even though i don’t think the multiplier is above 1……..

    THERE IS NO MULTIPLIER AT ALL. IN THIS CASE THERE WAS A MASSIVE INCREASE IN TOTAL SPENDING, BUT IT REVEALED ITSELF AS AN EVEN GREATER INCREASE IN GDP SINCE SPENDING WAS ALSO SHIFTED FROM WHERE THIS SPENDING WAS INVISIBLE TO GDP TO WHERE IT WAS NOW VISIBLE.

  7. Hi GMB!!! I have a good joke on “economic stimulus” on my blog. I am considering just using my stimulus check to buy domestic beer and a male prostitute since they are both ways to put my money into the American economy. LOL!!!!

    All this is insane no matter where you hang your hat. Tell me, in the American stimulus package, they have tried to include educational grants… in an emergency stimulus package!!! I’m all for education, but how does that money jump start the economy quickly??? I am thinking of contributing mine to creating an organization to clear out all of the Senate and House and put “real people” in their place. You know, those who possess common sense!


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