Posted by: graemebird | February 10, 2009

!@#$%^&* STILL NOT GETTING IT: The Effect Of Stimulus Policy

  1. “For once Homer is right – the December retail numbers are out. The increase over November was 0.2543, the same increase for 2007 was 0.2093, for 2006 0.2172, for 2005 0.2364, for 2004 0.2352. So it was slightly higher than the last 5 years. It will be inteesting to watch the January drop-off this year compared to the last five years when that figure comes out.”

    Why wouldn’t Homer be right? There is no doubt that expansionary fiscal policy will steal money out of business-to-business spending, where it can help us recover, and it will push that spending into government expenditure and consumer spending…. categories that cannot help us recover.

    At the same time expansionary monetary policy will tend to increase ALL SPENDING CATEGORIES but in hard to predict ways.

    So Homer is likely to be right. Apriori stimulus policy will increase retail spending. But it won’t increase SPENDING as such. It will simply rob business-to-business expenditure and splurge that spending on retail.

    You see that Jason? You, Sinclair, Cambria and the rest of you really have no idea. Thats one reason why you end up getting beaten up by vandalising lunatics like Gruen. Your ignorance is one reason why the left tend to get their way in public policy.

    There is no substitute for learning economics. 

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Responses

  1. You see Sinclairs and Cambria’s first reaction was the wrong attitude. And CL’s first response was exactly the right attitude:

    “0.2543

    Wow! And a real bargain that was at only $10 billion.”

    Exactly right. Its cost us 10 billion dollars. And its wrenched money away from where that money could have helped progress the economy. So this measure hasn’t just made us 10 billion dollars poorer. Its made us poorer in two different ways.

  2. The stupidity never ends at Catallaxy:

    “Unless you believe the paradox of thrift is complete crap, then obviously the down slope of a bad recession, like we have now, is a problem because of the potential for all economic trends to overshoot in a big way. Factor in the crap state of the banking system and the overshoot looks like being big. That means there is a much better case than usual for fiscal measures….”

  3. Why would anyone have thought that Homer was wrong on this matter. Its a mystery to me why anyone would think that.

  4. We haven’t increased total spending at all – we’ve just brought it forward and cancelled out future spending. Anyone can borrow $40 billion and blow it in three months. But so what? After three months consumption will return to where it was, and will be even lower after that as the interest bill falls due. It’s a contraction.

    Only sodomites, nazis and other beasts would disagree.

    • But Fisk, what you are saying is true in a manner of speaking. But we want to be ruthlessly technical here. Its true we’ve shorted ourselves 10 billion, plus the interest, plus the deadweight loss on the future higher tax committment. But its worse then that again. Because it hasn’t increased nominal spending at all. Is just taken it away from a category that isn’t included in GDP.

      Lets look at it from a different angle. Spending is basically a function of the amount of money out there, and the demand for money for holding. How high do people tend to want to hold their cash balances. Supposing they wanted to hold lower cash balances. Well then spending would be higher. Now is there anything in the stimulus package that would make people want to hold lower cash balances? No not really. Except by sheer luck. What makes people hold lower cash balances is both the anticipation of readily available loan money and the habits gained by living in an inflationary environment. In both cases the stimulus has no bearing on any of that. So the spending must be unaffected or barely affected by it. So its pretty clear they are just robbing business-to-business spending.

      So the horror story just doesn’t bottom out. We have shorted ourselves the 10 billion. We are ten billion poorer. Then we have the interest loss. Then we have the deadweight loss on having to have higher taxes in the future BUT ON TOP OF THAT we’ve robbed the category of spending that we needed to send real resources too to bail out of this slowdown and go on from strength to strength. Hence the stimulus package has to be seen in as akin to carpet-bombing. Or bushfires. Or bovine plague. Or a sudden loss in our terms of trade.

      The stimulus package is an unmitigated disaster and there is just not good in it. It the theft that keeps stealing.

  5. Mr Bird

    I have tried to read through your posts and comments but fail to understand who you are talking to.

    What I mean is, you are seemingly answering questions but I cannot find the questions.

    RIGHT THAT HAPPENS A LOT. DON’T WORRY ABOUT IT.

    IF YOU BACK YOUR IDEAS UP WITH STRONG ARGUMENT PEOPLE WHO CANNOT DO THAT TEND TO SPAM YOUR SITE. I KNOW OF AT LEAST TWO REALLY SMART GUYS WHO HAVE THE COMMENTS FUNCTION ENTIRELY DISABLED. WHICH MAKES SENSE IF YOU DON’T WANT TO BE SWEARING AT PEOPLE ALL DAY I GUESS.

  6. Yes, you are right. There must be something better than “GDP” if it fails to capture a key element of spending. Admittedly it does cover “investment”. But it also includes “government expenditure” which should really be subtracted, rather than added.

    • The net investment is highly artificial. I would need to review so as not to send you astray. But technical adjustments aside net investment is really just what you would get if you summed up all of the balance sheets in the country. And you added together all the after tax retained profits. Like retained profits to business after taxes and dividends are taken out. People think of it as fixed heavy physical gear. But the actual figure is subject to manipulation. Because if you have monetary inflation these profit figures are going to be higher even if very little authentic capital formation may be going ahead. If we have inflationary conditions the tax man is making out like a bandit, the banks are hiring, the bigshots are voting eachother pay rises and so forth. All this is happening because profits are overstated, revenues are rising and people are thinking that when they pay back their debts they will be paying them back with lesser dollars. So you get a wealth delusion going on.

      Instead of just the retained earnings after taxes and dividends, if you take the entire income statement and sum all of that. Well thats far closer to real activity. Real economic activity. All of the sales revenues of everyone that sells anything in the economy entire. Now thats a far better indicator of activity for month to month comparisons so that you can tell how policy ought to be.

    • You see where I work we only buy from other businesses. We only sell to other businesses. Hence almost nothing that we do is counted in GDP. Yet we have to have millions of dollars in equipment, real estate, millions in cash at the bank…. well this is real capital we have to have to do business. The money the company puts up and risks. Thats real money. Every bit as much as the money that David Jones spends on stock. And yet we are not counted.

      Traditionally as that pdf shows, GDP is a lagging indicator of activity. And you could have a falling GDP and a seriously overheating economy if people saved, the government cut spending, but was debasing the currency. You could be steaming ahead with speculation and business running wild. And yet GDP could be falling because government spending had dropped and savings had gone up.

  7. Graeme Bird
    Translation Services
    Doc 21 338

    IF YOU BACK YOUR IDEAS UP WITH STRONG ARGUMENT PEOPLE WHO CANNOT DO THAT TEND TO SPAM YOUR SITE. I KNOW OF AT LEAST TWO REALLY SMART GUYS WHO HAVE THE COMMENTS FUNCTION ENTIRELY DISABLED. WHICH MAKES SENSE IF YOU DON’T WANT TO BE SWEARING AT PEOPLE ALL DAY I GUESS.

    Should read:

    My mind is such a feeble peanut of a sparrow testicle that I am incapable of substantiating anything I say with anything but gratuitous use of a slang term denoting the female genitalia. As I am already a sorry cleaner of s-bends subsidized by Centrelink my self-esteem is low enough as it is.

    I would disable the comments function permanently except

    1. I’m too stupid to figure it out
    2. I like gratuitously using slang terms for the female genitalia (it’s as close as I ever get)
    3. It’s the closest I ever get to human company.


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