TCS Daily


Multiplier Madness

By Brian Balfour - February 3, 2009 12:00 AM

Do you believe in magic?

When it comes to "stimulating" the economy, politicians across the nation are shamelessly relying on a bit of magic. The magic of the government spending "multiplier," that is.

Ever wonder where President Obama got his figures from when he claimed that his stimulus package will "create or save 3 million jobs?" From the multiplier.

The multiplier theory, made famous by John Maynard Keynes in his 1936 book General Theory of Employment, Interest and Money, basically says that each dollar of government spending "injected" into the economy will create a larger increase in national output. This is achieved because a portion of the new money will be spent on goods and services, becoming income to the providers of said goods and services. These providers then spend a portion of their new income on other items, and the process repeats itself many times over. The net result, as the theory goes, will be new jobs and an overall increase in the nation's income.

Indeed, it seems like multiplier madness is sweeping the nation, with Keynesian economic theory dominating political and mainstream economic thought once again.

With so many experts placing so much at stake on the basis of this theory, the multiplier must be a sound foundation for public policy, right?

Not exactly.

As economic journalist Henry Hazlitt stated in his 1959 book, The Failure of the 'New Economics', "There are, in fact, so many things wrong with the multiplier concept that it is hard to know where to begin in dealing with them."

For starters, the amount of government spending is not taken into consideration when calculating the multiplier. As Hazlitt noted, "the amount of investment, as such, appears to be irrelevant to the mathematics of the multiplier or the reasoning on which it rests."

Do you really think twenty dollars of government spending will have the same impact per dollar as $20 billion, or $20 trillion? Believers in multiplier magic do.

Furthermore, consider that statistical models designed to calculate such multiplier effects suffer from what Nobel Prize winning economist F.A. Hayek described as the "Pretence of Knowledge" in the title of his Nobel lecture. Hayek warned other economists against the use of mathematical techniques to determine "quantitative or numerical constants" regarding the "study of such complex phenomena as the market." Efforts to do so can be harmful because they "proceed on the fiction that the factors which they can measure are the only ones that are relevant." Hayek's warning can be applied to the multiplier in two specific ways.

First, the opportunity cost of government "stimulus" spending can not be captured by multiplier models. In other words, nobody can ever know what entrepreneurial endeavors would have been created if a portion of available resources wasn't already tied up in government-financed projects. There's no telling the income and job growth that would have been created if the private sector were utilizing those resources for wealth-generating opportunities. The productivity lost is noticeably absent from multiplier calculations. But just because it can't be measured makes the lost productivity no less real.

Secondly, calculations of the multiplier are filled with data based on past behavior. Human beings, however, are not robots. The future decisions of millions of individuals within the marketplace as a response to massive government spending can not be predicted with computer-like precision. Any attempt to place billions of taxpayer dollars at risk based on such flawed predictions is foolhardy and irresponsible.

And finally, what can the multiplier tell us about long-term effects of government "stimulus" spending?

Even multiplier advocates admit any potential job and income effects of government construction projects are a one-time, temporary change lasting only as long as the project itself. What the multiplier will not reveal is the reallocation of resources that will be necessary after the dust settles. Resources that were employed supporting the government projects, both directly and indirectly, will need to be redirected by the private sector.

Necessary during this reshuffling period will be a loss of jobs and a time of idle resources. It will take time for the construction workers, tractors, cranes and countless other resources to be put to use in new combinations and locations by various entrepreneurs attempting to respond to new and changing consumer needs. Likewise, the additional waiters, grocery clerks and other workers that were hired in response to the temporary influx of money into the local economies hosting the public projects will find themselves unemployed. The short-term activity created by government projects will thus be followed by a rise in unemployment and reduction in output.

It is disappointing that such a flawed concept as the multiplier has once again captured the imagination of policymakers nationwide. Unfortunately, just like when a carnival magician produces a quarter from behind a child's ear, the "magic" of the multiplier is mere illusion.


Brian Balfour is a policy analyst with the Civitas Institute in Raleigh, NC (www.nccivitas.org)
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59 Comments

Another unknown uncertainty
The fact that a fickle government may step in and change the economic playing field is enough to affect market behavior and increase uncertainty of economic data.

The multiplier effect
Hazlett and Hayek notwithstanding, the multiplier effect is very real.. and easily demonstrable. (Nor does Mr Balfour give any precise illustration of how the concept is in error. Which is an essential requirement if his piece is to be didactically effective.)

Let's take three thousand dollars as our example, and track its course through the economy.

The first thousand goes toward tuition assistance. It does triple duty, first by funding a young person's education. And as it's targeted toward a low-income youth, a person who otherwise might not have gotten that education.

Second, it also helps the school stay afloat, bringing another paying customer to the school that it might not otherwise have had. On the strength of this and other low-income students, the school is able (third) to hire another instructor. Who gains a job.

Not bad. Now the second thousand goes toward an out-of-work concrete finisher. He's being employed to repair a bridge. His family's happy because they get to eat and pay the light bill. His landlord's happy because he gets the monthly rent. Uncle Sam is happy because he's paying taxes.

In fact the thousand is doing him enough good that he buys a new TV from Circuit City. So he's boosting the economy and somewhere down the line, other people are paying taxes. There's a cascade of beneficiaries from this thousand.

Note that in neither of these government expenditures can the thousands be said to be "tied up in government projects". They are both put to work instantly, on the street. And observe that both start earning the government money right away, in the form of revenues.

Now let's look at the third thousand. This one is money saved by an investor, because his taxes were lowered. Wow, he says. And after he finishes his tax return his next move is to put it in a hedge fund, where it gets used to wager against an upturn in the economy.

This thousand does not work. It just sits there until it wins or loses the bet. It pays no taxes, it pays no wages. And it does not benefit one single thing in the industrial economy, the job economy, the manufacturing economy or the retail economy.

You may argue that such an investment is not typical. But you would be wrong. The largest institutional investors have all been favoring these sorts of strictly financial sphere gambles, as opposed to ordinary stocks and bonds that may actually do some work.

I get the impression that roy doesn't even read these articles
He skims past all arguments made by the author, and just declares that the multiplier must be real.

Hey roy, what's the multiplier for the dollars that were taken out of the economy in order to fund these govt boondoggles that you always support?

$100/hr minimum wage will cure all ills.

The size of the economic pie is fixed.
How can anything multiply?

All you are describing is redistribution.

The author is from NC
Maybe there is still hope for NC.

These are arguments?
Actually I did glance over the article before posting. You can tell by my references to it, and the one quote.

But the author didn't make any arguments about the multiplier effect. He only made assertions. That was my criticism.

Hazlitt's argument was that any discussion of a multiplier doesn't take into consideration the government's initial outlay. Which is absurd on its face. If the principal is zero, any multiplier of that number will still be zero. So by definition, if there is to be a multiplier, there must be an initial investment.

The lesson the author takes away from Hazlitt is this: "Do you really think twenty dollars of government spending will have the same impact per dollar as $20 billion, or $20 trillion? Believers in multiplier magic do."

Which is beneath stupid. It's a moronic contention. No doubt one holding great appeal for you.

If you think he made a defensible argument, summarize it for me. And I will address it.

"Hey roy, what's the multiplier for the dollars that were taken out of the economy in order to fund these govt boondoggles that you always support?"

Offer some specifics, please. Which boondoggles?

My contention, if you've lost your focus at this point, is this: anything that increases the ciirculation of money through more hands offers increases in the amount of employment opportunity. It also increases the number of taxable events, thus offering greater revenues for the benefit of federal, state and local governments.

In large part, these returns on investment make the program pay for itself. But at the end of the stimulus period, an essential step in the plan is to RAISE TAXES. That puts the outstanding remainder of the initial expenditures back in the public's hands.. proving the worth of the investment.

Here's the game plan: when things are slow, plow money into the enterprise. When things are good, take money back out to repay the initial investment. Simple and effective.

I see you need a simpler example
When you buy a car, how many people get paid? A lot, right? And when you don't buy a car, how many jobs are in danger?

The same number. Your spending has a multiplier.

Also when you buy a car, everyone who makes money on the transaction pays taxes on their gain. So if the money ultimately comes from the government, the government gets paid back.

Also, when all those people get the proceeds from the sale in hand, they spend it. Thus there's a new circle of beneficiaries of that cash the government spent. And a new circle of taxpayers paying their gain back to Uncle Sam.

And if it doesn't get paid back 100 percent the government has to raise taxes temporarily to recover its full cash outlay. So you get the car, but only have to pay back a portion of its cost in the form of taxes. The remaining portion gets paid back by people down the chain from you.

That's the multiplier.

Only a percentge
On a per car basis, each element in the supply chain gets a piece of the car price.

As for taxes being paid on each transaction, more money is then being extracted from the economy.

It's like a VAT.

There is NO multiplier in a closed system. Energy (wealth) can only be lost, not created.

You need to peel back one more layer to understand the source of the wealth and how people and technology add value to that wealth. THAT is the real multiplying effect.


"Also, when all those people get the proceeds from the sale in hand, they spend it. Thus there's a new circle of beneficiaries of that cash the government spent. And a new circle of taxpayers paying their gain back to Uncle Sam."

When government robs Peter and pays Paul, there is no multiplying effect, only divisive effect.

Wealth for all to share in
Here's your problem: "There is NO multiplier in a closed system. Energy (wealth) can only be lost, not created."

Do you really think we live in a closed system? I wouldn't know where to begin, with this one.

The multiplier is commerce between people. The only reason we have a butcher, a baker, a candlestick maker is that they trade with one another. And the sum of this trade is worth More, not less, than its parts.

If that were not so we'd find we each had more wealth just by being self sufficient, making our own clothes, our own house, growing our own food, etcetera. But by the magic of money we can enjoy commerce with one another.

And the multiplier that increases the gain for each and all is the VELOCITY of money. (I picked up using these capitals from NearNo). The more hands money passes through, the more each link in the chain has the opportunity to glean a little more wealth from the system. Everyone, through the use of money, trades something someone else values for something he values more than the thing traded.

It's a growing, living economy. It's not fixed and dead, with finite limits. Slow down the velocity of money and everyone grows poorer.

How and why can it be more?
You always suggest the economy is a fixed pie with the rich 'taking' more than their 'fair' share.

If your velocity of money was true, a Ponzi/Madoff scheme should be a great multiplier as they accelerated money transfers.

"Everyone, through the use of money, trades something someone else values for something he values more than the thing traded."

WHAT! You every FREE trade is a win-win? Do you really believe that? You have not in the past.

Here's how it works
"You always suggest the economy is a fixed pie with the rich 'taking' more than their 'fair' share."

No I don't. The economy is a dynamic machine. And it has become one in which the manipulators of the financial system have a greater advantage than do the actual producers of goods and services: the labor force. In fact such people even have an advantage over ordinary investors, the owners of public companies.

"If your velocity of money was true, a Ponzi/Madoff scheme should be a great multiplier as they accelerated money transfers."

This makes absolutely no sense. Such people were a black hole, down which disappeared huge sums of money.

The rest of your comment is similarly so off the tracks I can't even figure out what you're getting at. If you want to understand the virtues of the circulation of money you just have to look at the present, where that circulation has stagnated to a near halt.

Compare economic activity now, with next to no money available, to that of any other time. There's no business, right? And when there's no business, no one's hiring.. so there's no jobs.

To correct such a condition, it doesn't matter where the money comes from, just so long as the money comes back. It's good, of course, for the newly arrived money to avoid becoming inflationary. And for that to happen, all that's needed is to balance the amount of money in circulation by withdrawing it once the engine is running hot again and we can afford to remove the stimulus.

The normal way of doing that is by raising taxes. Our failure to do that in the good times is the proximal cause of the balloon, and thus of the collapse.

Stagnation
If the money that circulates does not represent real wealth, only claims on possible future wealth, why should people circulate such IOUs?

People are losing the faith in government. How does that affect the 'full faith' and credit of the USA?

He didn't provide arguments, he found flaws in yours and asked a simple question
"Here's the game plan: when things are slow, plow money into the enterprise. When things are good, take money back out to repay the initial investment. Simple and effective"

Total horsehockey!

You really don't know jack about economics. 'economics' in your world view is 'whatever I dream it up as being'.

Just like Obama, apparently.

This multiplier BS would explain why Pelosi said that 500 MILLION Americans lose their job every mon
.

Your cheap, Marjon! It should be $400/hr minimum.
.

Money Multiplier doesn't work anymore than chain letters do
"The same number. Your spending has a multiplier."

Total BS! There is no 'multiplier'. There is the same money being used for exchange of the same value of goods and services, with variations on what value at any given time those goods and services are worth.

Unless you live in Zimbabwe, when it is the money that has more variation (always less by the second) in value to goods/services. Zimbabwe and the soon-to-be future Obama America.

"Also when you buy a car, everyone who makes money on the transaction pays taxes on their gain. So if the money ultimately comes from the government, the government gets paid back."

No...not when the bulk of the people getting that 'free' government money just put it into savings or pay off debt (reflective of PAST car sales, to use your example). Just like the banks are using TARP to shore up their balance sheets and not to lend. Just like people used the bulk of their 'stimulus checks' last summer. Yet, Roy keeps maintaining otherwise in the face of empirical historical data that refutes his wacky 'money multiplier' world view.

Otherwise, if your 'theory' was even remotely correct: The government would have made ZILLIONS during the Great Depression. It didn't.

Hey Roy, leave me a mailing address in your reply! I have a chain letter I need to send you. See, if you send me $5 and the guy who sent the letter to me $5 and $5 to the gal who sent him the letter he then sent to me...then lop off the top person and put your name/address on the bottom of the list after me and then send the letter to another 100 people....

That's the multiplier!

You don't know anything about VELOCITY of money other than how to use it as a buzzword
Because if you did, you'd know that there is no 'multiplier effect'.

I suppose next you'll tell me that banks create MONEY, too?

If you want more VELOCITY, then cut taxes...especially investment taxes. Introduce demurrage currency. Then you'll see some VELOCITY that leads to more WEALTH CREATION.

Or, you can inflate the currency to worthlessness by creating fiat money out of thin air to spend on Dem union buddies. That works too, sans the wealth creation.

Free trade: win-win
"In every voluntary transaction, both the buyer and seller gain. Here's a simple proof: Suppose I sell an apple to a student for $1. The student buys the apple because he would rather have the apple than the dollar bill. Thus, by purchasing the apple, he improves his situation. On the other hand, I sell the apple because I'd rather have the dollar bill than the apple. I too am better off."

"In Das Capital, Karl Marx popularized the view that all exchanges under free enterprise capitalism involved an equality of values and therefore one person's gain must be another person's loss. But now we see that just the opposite is true: All transactions in a voluntary exchange involve an inequality of values. In fact, without an inequality of values, no voluntary exchange would ever occur."

http://www.mskousen.com/Books/Articles/charley.html

"Taxation is the price we pay for failing to build a civilized society.""
" Too often lawmakers resort to the force of law rather than the power of persuasion to solve a problem in society. They are too quick to pass another statute or regulation in an effort to suppress the effects of a deeprooted problem in society rather than seeking to recognize and deal with the real cause of the problem, which may require parents, teachers, pastors, and community leaders to convince people to change their ways.

Too often politicians think that new programs requiring new taxes are the only way to pay for citizens' retirement, health care, education or other social needs. "People just aren't willing to pay for these services themselves," they say, so they force others to pay for them instead.

Supreme Court Justice Oliver Wendell Holmes once said, "Taxation is the price we pay for civilization." But isn't the opposite really the case? Taxation is the price we pay for failing to build a civilized society. The higher the tax level, the greater the failure. A centrally planned totalitarian state represents a complete defeat for the civilized world, while a totally voluntary society represents its ultimate success. "

"Thus, legislators, ostensibly concerned about poverty and low wages, pass a minimum wage law and establish a welfare state as their way to abolish poverty. Yet poverty persists, not for want of money, but for want of skills, capital, education, and the desire to succeed.

The community demands a complete education for all children, so the state mandates that all children attend school for at least ten years. Winter Park High School, which two of our children attend, is completely fenced in. Students need a written excuse to leave school grounds and an official explanation for absences. All the gates except one are closed during school hours, and there is a permanent guard placed at the only open gate to monitor students coming and going. Florida recently passed a law that takes away the driver's license of any student who drops out of high school. Surely, they say, that will eliminate the high dropout rate for students. "

"There is little satisfaction from doing good if individuals are mandated to do the right thing. Character and responsibility are built when people voluntarily choose right over wrong, not when they are forced to do so."

"Today's political leaders demonstrate their low opinion of the public with every social law they pass. They believe that, if given the right to choose, the citizenry will probably make the wrong choice. Legislators do not think any more in terms of persuading people; they feel the need to force their agenda on the public at the point of a bayonet and the barrel of a gun, in the name of the IRS, the SEC, the FDA, the DEA, the EPA, or a multitude of other ABCs of government authority. "

http://www.mskousen.com/Books/PvF/pvftext.html

This is a new low for you
You're destroying what remained of my good impression of your thinking skills. You've neither offered any argument nor refuted any of mine.

My comment went to the need to balance the federal budget. The only distinction I make (and it's a critical one) is that it not need be over a single year. We just need to balance it over the business cycle.

Your only comment: "Total horsehockey!"

Don't you understand that even in this kiddie playground the mark is higher than that? Do better.

Just asserting it doesn't make it so
"If you want more VELOCITY, then cut taxes...especially investment taxes. Introduce demurrage currency. Then you'll see some VELOCITY that leads to more WEALTH CREATION."

You're sounding more and more like that NeNo Nanod fellow. Easy on the caps.

We've tried that experiment. And what we got in "wealth creation" was a pyramid scheme, where so much money went intom investments rather than consumption that the investment markets were clogged. Too little actual value was being chased by too many trillions of eager dollars.

It didn't create any actual wealth. All it did was to hyperinflate the upper financial spheres. The total face value (notional amount) of the derivatives market, for example, amounts to $182 trillion dollars! That's far more money than is required to adequately represent the size of the feet on the ground world economy.

So the money that was spent investing in this elaborate nest of interlocking hedges has pretty much been a waste; it does no real work.

If it just sits there, by definition it has zero velocity. Or, as we're coming to designate such things around here.. ZERO VELOCITY!

So it has in reality been the derivatives market that's been devaluing to the point of near worthlessness.. not the currency. While out in the real world, where money looks like little paper coupons, prices have actually been dropping.. in an attempt to attract customers.

Dres up your argument a little better and I'll consider it afresh. It needs work.

You prove my point
You're correct. When two parties trade cash for goods, both win. And greater prosperity is attained by both.

Therefore the greater the velocity of money, the more trades that occur. And the greater the increase in total wealth.

We are seeing the opposite now: the slowing of the velocity of money. And the direct result is less trade and fewer jobs. An injection of funding is urgently needed.

Not what the evidence shows
"People are losing the faith in government. How does that affect the 'full faith' and credit of the USA?"

You've apparently been greatly out of touch. People, since November 4, have been greatly impressed with the potential and power of good government. Presidential ratings have climbed quite a bit since we switched presidents. The public, at this point, stands behind the government as being the only entity capable and willing to get us out of this big fat mess.

And they tend to blame the people who got us into it.

Now let's touch on "full faith and credit". The most sincere form of endorsement is when someone puts his money on your pony. And in the first sale of US Treasury offerings since the election, it was found that foreign central banks were eager to buy up T-bills even when the interest being offered was virtually ZERO.

You can't get a higher endorsement than that.

Because horse-hockey is horse-hockey, Roy.
I could care less what you think of my 'thinking skills'

not when you don't exhibit any of your own whatsoever---as you do here:

"Here's the game plan: when things are slow, plow money into the enterprise. When things are good, take money back out to repay the initial investment. Simple and effective"

Poppycock! BS! You want to sell me the Brooklyn Bridge as well?

What you had stated is utter nonsense backed by NOTHING. Historical reality completely disproves your...whatever it is that makes you believe that nonsense.

Is that more elaborate for you?

The Conference Board Consumer Confidence Index™ Dips in January
"The Conference Board Consumer Confidence Index™, which had decreased in December, inched lower in January and continues to be at a historic low. The Index now stands at 37.7 (1985=100), down from 38.6 in December. The Present Situation Index declined slightly to 29.9 from 30.2 last month. The Expectations Index decreased moderately to 43.0 from 44.2."

http://www.conference-board.org/economics/ConsumerConfidence.cfm

What is your 'evidence', wishful thinking?

People keeping their money: in their self-interest
Banks have been fully injected but are not freely trading. Why? They don't know how much junk they hold.

People took their 'stimulus' last year and paid off debt.

People ARE making trades in their best self interest by keeping their money.

Me asserting? What are you doing all the time?
"It didn't create any actual wealth"

Really? Real GDP kept growing. New and innovative products and services were introduced. No 'actual wealth' was created?

Who cares what the notional value of the derivatives market was? That is not representative of all of any wealth that was spent or created on it. More horsehockey of yours, I am afriad.

And none of your class warfare rant has ANYTHING do with what you were originally claiming velocity was about. You're just throwing another red herring out there (actually several) to avoid admitting you were wrong.

"So the money that was spent investing in this elaborate nest of interlocking hedges has pretty much been a waste; it does no real work."

So? Now that it has come crashing down...how has it impacted the money supply one iota? It hasn't. Because it wasn't MONEY.

" While out in the real world, where money looks like little paper coupons, prices have actually been dropping.. in an attempt to attract customers."

Yeah, because people are paying off debt and/or saving up in case of catastrophic job loss --- a regular event in Obama's America.

Whether I deposit my money in the bank or buy it at the store, my personal contribution to the velocity of said money is the same.

The issue isn't the money's velocity, but rather what it is put to use for. High money velocity derived from productivity-enhancing investments is way better for society than the kind derived from debt-fueled consumer consumption -- which is what you are advocating when you aren't trying to rant against 'derivatives' and $182 trillion dollars that never changed hands at all.

" Keynesian policy is a set of self-justifying policy prescriptions. "
"The multiplier-accelerator theory explains why consumption is increasing, given that investment is increasing, and why investment is increasing, given that consumption is increasing. But it is incapable of explaining what determines the actual levels of consumption and investment (except in terms of one another), why either should be increasing or decreasing, or how both can increase at the same time. Students are left with the general notion that the two magnitudes, investment and consumption, can feed on one another, in which case the economy is experiencing an economic expansion, or they can starve one another, in which case the economy is experiencing an economic contraction. That is, Keynesian theory explains how the multiplier-accelerator mechanism makes a good situation better or a bad situation worse, but it never explains why the situation should be good or bad in the first place."

"For instance, if the government is convinced that wages will not fall and is prepared to hire the unemployed, then unemployed workers will not be willing to accept a lower market wage, ensuring that wages, in fact, will not fall. Thus, while the intention of Keynesian policy is to stabilize the economy, the actual effect is to “Keynesianize” the economy. It causes the economy to behave in exactly the same perverse manner that is implied by the Keynesian assumptions. This convoluted interrelationship between theory and policy has long obscured the fundamental flaws in the theory itself."

"Why is government policy grounded in such a flawed theory? From a political point of view, advocating and implementing Keynesian policy is the surest way to election and re-election. The gains from printing and spending money are immediate, highly visible, and can be concentrated on individuals who make up powerful voting blocs. The costs of this policy are incurred at a later date and can be spread thinly across the entire population, making the link between policy and long-run consequences difficult for the voting public to perceive."

"...we need a more enlightening theory—one that recognizes what market forces can do on their own to maintain macroeconomic stability and how those forces are foiled by government-supplied stabilization."

http://www.thefreemanonline.org/columns/the-trouble-with-keynes-2/

Robbing Paul to Pay Paul
"But Röpke cannily directs our attention to the fact that govern­ment "investment," which begins as a policy of robbing rich Peter to pay poor Paul, ends up by rob­bing Paul to pay Paul. The Key­nesian "multiplier" effect is paral­leled by something which might be called a "divisor" — or at least a "subtraction" — effect. For, while government spending undoubtedly stimulates demand — and more in­vestment in some areas to meet that demand — it also serves to scare free investors into hiding. With the "divisor" effect cancel­ing the "multiplier" effect, a gov­ernment under the spell of Key­nesianism must resort to more and more massive doses of taxation and/or inflation simply to stay in office. "

"As Röpke says, the point is eventually reached where taxation, far from bearing down exclusively on the rich, begins to rob the middle class of its potential sav­ings and even some of its "pro­pensity to consume." Even the masses come more and more under the tax collector’s gun. With all classes paying in taxation and/or inflation, "money is juggled from their right-hand into their left-hand pockets." This practice, says Röpke, is not only "nonsensical"; it means the death of society as an entity which is counterpoised to the State. "Quite apart from its dampening effect on individual ef­fort and responsibility," so Röpke writes, "it involves the expendi­ture of large sums on a vast public machine constantly growing in size and power." "

"The objection to Keynesianism is not that it won’t work economi­cally — after all, if it is a mere question of balancing input and output, any system can, theoreti­cally, do as well as any other. With force, "full employment" is always attainable. The Incas of Peru "balanced" their economy. And in Russia there is "full employment," even though the State had to mur­der three million kulaks at one point to get it.

The real objection to Keynesian­ism is, as Röpke notes, a matter of morality; it debases the nature of man. Since the ratchet-action of politics makes a return to the vol­untary society more and more un­likely, people become universally cynical. Bastiat’s definition of the State becomes all too true: the State is "the grand fiction by which everybody lives at the ex­pense of everybody." And, since nobody has an individual surplus to use for cultural expenditure, patronage of the arts, or buying time for creative leisure, all of these things must be taken over by government. Röpke’s final damning statement is "charity, honorary functions, liberality, conversation, leisure, everything that Burke included in the expression, ‘unbought graces of life,’ all these are strangled by the State." "

http://www.thefreemanonline.org/book-reviews/a-reviewers-notebook-9/

My bad.

This is just sad
"Poppycock! BS! You want to sell me the Brooklyn Bridge as well? What you had stated is utter nonsense backed by NOTHING. Historical reality completely disproves your...whatever it is that makes you believe that nonsense."

The above is precisely the kind of argument I would consider to be "backed by nothing". What you're showing us is that you're incapable of framing a coherent argument. All you're doing is trying to be cute in your insults.

My comment (to repeat myself as many times as needed) went to the need to balance the federal budget. The only distinction I make (and it's a critical one) is that it not need be over a single year. We just need to balance it over the business cycle.

If you want to refute this, prove to us that it is not necessary that the federal government seek to balance expenditures with revenues. Or, prove that if this IS a good idea, there is some reason why it has to take place on an annual basis rather than over the business cycle-- the more obvious rhythm for achieving balance.

Or else you have to concede the point. That was my point, and that's how debate works. Tell us just how my argument fails.

In other words you have to do some work. It's like going before a judge and responding to the complainant by saying "Poppy cock! BS! Horse hockey!" You just ain't going to convince the Judge that way.

At least, a better class of argument
At least you're starting to offer some specifics. Would that you would always do so, and not just throw fish from the balcony.

Initially you said "If you want more VELOCITY, then cut taxes...especially investment taxes. Introduce demurrage currency. Then you'll see some VELOCITY that leads to more WEALTH CREATION." And I replied that we'd tried that experiment.. and it failed to create any actual wealth.

In fact twice in recent years it has wasted unimaginable sums of wealth (2002 and today). Which is demonstrably true.

Don't try to take any credit for increases in the GDP due to that failed strategy. Those increases didn't come about from any increasing concentration of wealth at the top. In fact this trend became counterproductive, as investment funds grew so profuse as to outgrow any real demand for them. Thus they went into the Big Casino of hedges and speculation instead.

All that money collecting around a market that was already fairly satisfied, in terms of the need for seed capital, had nowhere to go other than into increasingly rarefied forms of gambling. THAT is what led us to the fall. That and a more specific greed among the sleazier mortgage originators, emboldened by a lack of due vigilance.

To which you just say "You're just throwing another red herring out there (actually several) to avoid admitting you were wrong."

But you can't get there just by asserting it. I'll be glad to admit error if you just show me where it is. And that, you haven't yet done.

You could begin by following this windfall mass of so-called investment capital (deriving from preferential tax treatment) to see just what it bought. It bought puts, calls, futures, hedges, offsets and gimmickry ordinary mortals can't begin to understand. It bought forwards, swaps, options, knock-ins, range accruals, KIKO forwards.. anything but something real.

The overwhelming mass of this lump of ill-gotten lucre did NOT buy startup capital for venture firms. Nor did it do anything to enhance productivity. People working, earning and spending in the marketplace enhance productivity.

So much money decoupled from the ordinary real-world economy encouraged greater lending, where there was a great supply-side push to get people to live on borrowed funds. And now that the music has stopped, it's obvious that people would want to live more cautiously and start paying down their debt.

HOWEVER this urge to pay down debt did not precipitate the catastrophe.. it followed it.

It is undeniable that the credit markets are frozen.. and that as a direct result, overdrawn businesses are having to lay off workers and in many instances close up shop entirely. All this contributes to a shortage of moolah on the street.

So the condition is one where money in circulation has zero velocity. And it's obvious that increasing that velocity by injecting funds as close to street level as possible, would give the greatest bang for the buck.

The money should go into the pockets of ordinary people.. because they're the ones who will spend it instantly, creating more demand and starting up the supply engine again. And sure, lots of it will go toward paying down debt. But that's a good thing too. Reducing the debt overhang will help us in the longer run, while spending cash at the store will help us today.

Giving the gamblers more money to continue feeding their habit will NOT be helpful. I support increasing their taxes so they can finally begin putting their capital to better use. Their investments to date have not been , in your words, productivity-enhancing. They've been a waste.

On the pursuit of profit
Here's the central flaw to your entire paradigm of "wealth creation". In your model, all the resources of the world economy must be directed solely toward enterprises that make yet more profit for individual speculators.

When in fact the jobs that most need doing are money sinks. That is, there are needs that society's wealth must be used to pay for.

A good example is schools. Your world only tolerates a school if it can be run at a profit. And that means that only the wealthy can afford to send their kids to a decent school. But in fact ALL kids need to get a good education. If they don't, they become a drag on the economy.

So in the long run, we save money by spending it on schools. And nobody earns anything doing a good job beyond just their salary. It's a societal need that must be met, if we are to all prosper.

As of today, schools in my state are so starved for funds that they're recommending that class sizes be increased again. Library branches are being closed. And the IB (International Baccalaureate) program in one of our best magnet schools is being cancelled. Lack of funds.

It's tragic. And it's stupidly short-sighted. To tie up needed funds so a tiny number of people can play at the game of capital accumulation while such needs are going unmet is unconscionable.

If they can't make a buck at it, that kind of person likes to imagine such needs don't exist. They would be very, very wrong.

Trivializing suffering
Your point is picayune; we all know what she meant. Probably after a long day of running her mouth, "half a million" and "500,000" simultaneously appeared in her mind.. and she chose the wrong words.

The important datum is that in January we lost not half a million but 626,000 jobs. She was pointing toward the magnitude of the crisis.

Tell me.. do you think of job loss on this scale as being a crisis? Or is it acceptable to you?

Who is 'we'?
Job losses like this are comparable to the early '80s. What is new?
What fixed it then was tax cuts.

utter nonsense
You have not demonstrated the multiplier effect at all and in fact seem to have no idea of what the theory purports. To contemplate the "multiplier" you must first make some assumption about what Keynesians call the "marginal propensity to consume" and the "marginal propensity to save". You obviously have no idea what these mean. I am not going to explain it to you...go get an elementary macro economics book and study that.

Finally, your assumption that someone who saves or doesn't "consume" is a drag on the economy. Wrong. Again get the econ book and you will see that savings is the KEY to capital investment....you need a lesson man.

Fashioning win-win outcomes
Joanie-- You're saying that if we offer people who've been put out of work the chance to take a job of finite duration, that will interfere with their ability to go back to school?

I could see your point if the government marched them off at gunpoint. But what they would be doing is offering structurally unemployed workers an additional option.. a chance to earn some income right away.

This makes a big difference if you've been supporting a family on an income low enough that you have no savings-- in fact, are starting to use up your cards just to pay monthly bills. When these families get dumped off the payroll it only takes a couple of months before they start to see the electricity being turned off, and they're getting notices in the mail from their mortgage holder.

Six months or a year's not enough time for a carpenter to retool himself as a.. what? We're in the kind of recession/depression where every category of work is being affected. So there are no opportunities in any field. Holders of master's degrees in financial planning are in the long line right next to the bricklayers.

Carpenters work on short contract anyway. And if there are no more luxury homes being built, whereas there is a very long list of unmet public needs, like dilapidated schools maintenance.. it's a marriage made in heaven. Their kids still get fed a couple of times each day, the mortgage holders get to earn some more income on their investment and we don't have to pay out unemployment in return for no work getting done.

Work that's both immediate and necessary is a win-win situation. We defer all these tasks during the good times, so the politicians can buy popularity by keeping taxes down. That's fine, until we're in a crisis. Then we need the ability to keep people employed for a while until things start to straighten out.

Taking responsbility for yourself ( a BHO principle, or so he says)
A friend was offered a layoff, took it, went back to school for a teaching certificate. He liked teaching physics better than working for a defense contractor.

Those who depend upon others for their careers will always be disappointed.
Those who improvise and adapt will overcome.

I just finished watching a couple of Brits living with a primitive tribe in New Guinea. The tribe was living off the land and 'happy'.

Why did the Brits ancestors and my ancestors learn to survive through ice ages and create a culture and technology that brought them to the moon? They were forced to adapt or die. Those that adapted passed on that trait to us.

Losing a job forces people to take responsibility (a BHO principle) for themselves.

Pioneer spirit
"Those who depend upon others for their careers will always be disappointed. Those who improvise and adapt will overcome."

It's true that self-employment offers some advantages over being in the job market. But the majority among us don't have the talent or the taste for that kind of life. We enjoy the relative ease and security of "just doing our job", while the boss has all the worries of keeping the ship afloat.

And in uncertain times like these, it's the workers, the bosses and the self-employed alike who find themselves in trouble. For far too many of us (598,000 in January alone) we suddenly find ourselves stripped of resources, but still with a mortgage to pay and mouths to feed.

In this light, your platitude about "taking responsibility for yourself" makes it look as though all one needs to do is to go off with his flintlock and kill mastodons for a living until the crisis blows over. That's highly unrealistic. There are far fewer ways to make a buck now, but still the same number of mouths to feed. You do the math.

Worse, you make it sound like it would be an act of evil for the government to offer work to whoever wanted it, to rebuild shabby schools and decaying bridges. And act as though a paying job right now would be bad for their character. Do you have any idea how this kind of thing sounds to normal people?

This "adapt or die" crap is exceedingly unpopular with the masses nowadays. You might want to put a lid on it when you're out in public.

The failure of ALL the markets
Somerled.. you appear to be addressing marjon with these arguments. But I think you're really talking to me. Hence, allow me to respond.

To see the results of the multiplier, let's track the course of two dollar bills. The first ends up in the control of some major institutional investor, who directs the work of several billions of similar dollars.

He puts it along with the others into a large credit default swap fund. As no one can now even give a hazy idea of its actual value, the use of this dollar is zero. It is frozen in an illiquid asset and can perform no useful work.

The second dollar goes into the hand of a guy who's out of work, frantic and owes his monthly mortgage. He combines it with his other $899 and pays the note for another month. With this act he helps keep the holder of the note solvent. He stays in the house, benefitting his neighbors as well as his family. He doesn't have to go to a shelter, saving the locality the resources needed to house and feed his family. And he continues to be able to actively look for work.

If there are no available jobs on the private market, he's out of luck for the coming month. That is, unless the government decides to use funds toward refurbishing the local school. In that event, he signs up and starts earning money again.

The dollars he earns in that endeavor go out into the community immediately, in the form of purchases that help other employees keep their jobs, and proprietors keep their doors open. So the dollar earned does double, triple and quadruple work as it is spent and spent again.

Each time it is spent, a portion goes back to the government. The return calculated for a dollar injected in this fashion is $1.70.

We like to call that "the multiplier".

2. "Finally, your assumption that someone who saves or doesn't "consume" is a drag on the economy. Wrong. Again get the econ book and you will see that savings is the KEY to capital investment....you need a lesson man."

A good theory, and one that has just been tested in the laboratory of real life.

What developed as a direct result of tracking all the dollars in circulation upward into the hands of investors is what we see now: a toppling of the house of cards, in which the value of the sum total of investments is something like nil. That is, the owners of those investments can't afford to sell them for what they're worth for fear of going under.

What we're seeing today is the total systems failure of a structure that exalts the financial sector above those sectors that perform actual work. Nominal dollar "wealth" by this legerdemain (that is, the constant addition of more investment dollars) so greatly exceeds the actual values of the entities being invested in that the balloon has become over-inflated. We're seeing the sudden DEFLATION now.

I think the mistake being made by so many is that when one reads about all this in some econ textbook, one then leaps to the assumption that he knows how it all comes about in the workaday world. And before you really know the score you have to go outside and check your figures against the action on the playing field.

What 'masses'?
Unemployment is not that high.

But those are the kind of useful idiots you socialists need, government dependents.

"Worse, you make it sound like it would be an act of evil for the government to offer work to whoever wanted it, to rebuild shabby schools and decaying bridges. And act as though a paying job right now would be bad for their character. Do you have any idea how this kind of thing sounds to normal people?"

How many laid off bankers are going to be working in union jobs to rebuild bridges and schools? Because they WILL required 'skilled' union labor for any government funded project.

No, it's just pointing out that you don't know what you are talking about.
Like you admitted, you just glanced at the article, then spewed forth your usual ignorant nonsense.

--

Ok roy, you claim that govt spending increases the velocity of money.

Tell me, just how does taking money from the person and giving it to someone who votes for a living supposed to increase the velocity of money?

Your dealing with a person who thinks that cranking up the money presses creates wealth.
roy knows what he wants to know. Nothing more, nothing less.

Missing the points
Two points some of you are missing:

One, Austrians don't say that money does not multiply in the economy, but that quantifying it using MPC and MPS is flawed. Future human action does not often follow past human action, particularly in periods of rapid innovation. Also, preferences are not mathematically measurable. E.g., think of the transitive property: If A>B and B>C, then A>C. But translating that to human preferences is meaningless. I might like vanilla ice cream more than chocolate ice cream, and chocolate more than strawberry. But I also like strawberry more than vanilla!


Second, although multipliers are not quantifiable, there is no question that on average a privately invested dollar multiplies in the economy at more accelerated rates and to higher levels than a publicly invested dollar. Why? Because as Hayek points out (many essays in "Individualism and Economic Order"), billions of investing decisionmakers do a lot better going to the marketplace with their dollars than a few Galbraithian plutocrats do when they take our dollars to invest on our behalf (as our agents.)

cordially,
Tim
PS: How do you create paragraphs in here? My post reads as one run-on paragraph. Much obliged for your help!

wrong again
simply stated you have no idea what the multiplier is...and once again I encourage you to look the concept up in an elementary econ text. Hint: the multiplier has NOTHING to do with what "...goes back to the government". You keep saying the same thing over and over again..believe me, that will not make it correct.



I wonder how your foot tastes, since it's often placed in your mouth. You just don't have a clue and I say that with great sympathy for one so confused.

see this
Here is a link that can get you started:

http://www.capitalism.net/Capitalism/CAPITALISM_Internet.pdf

Pay close attention to chapter 16

The multiplier
see page 690 of Chapter 15 for an explanation and critique of this useless Keynesian concept.

Hi, Super
Are you sure you're not just another name for Superheater? You have the same taste for insults and invective without evidence. If we don't share your sense of your own superiority we find that you have no argument. That's just like him.

A multiplier is money that does continuing work as it reverberates throughout the economy. The example I gave was a good one. A dollar spent on a losing bet.. that mortgage-backed securities are a good way to get rich, for instance.. would have no multiplier effect. Like a dead fish it just sits there until someone puts it in the garbage (declares the loss).

A dollar that gets spent on stimulating production every time it passes from hand to hand, in contrast, has an excellent multiplier effect. And even that portion of the dollar that goes back into the government coffers as revenue does useful work. It reduces debt and allows more spending on needed programs.

Oh good lord!
You referred me to a pdf document that by page 690 has only gotten into chapter 15? That would take me until next week just to download.

Why don't you just summarize this fount of knowledge in your own words? My reading list is already fairly lengthy.

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