Economic Alchemy

So Obama just signed a new "jobs" package

It's the first of several such measures Democrats have promised this election year to address the public's top worry: jobs. The measure includes about $18 billion in tax breaks and pumps $20 billion into highway and transit programs.

This is fascinating to me.  Let's take it in reverse order, starting with the $20 billion in new spending.  We are going to take 0.14% of the GDP out of some people's hands, who presumably thought they were employing the money productively, and put it into some other people's hands, and that is going to be a net jobs creator? **  Does this Keynesian myth really make sense to thoughtful people any more?

OK, but lets accept the logic - somehow if the government spends the money, it is more stimulative than if private people spend the money.  But then the whole package is contradictory, because it includes $18 billion in tax breaks.   Isn't that just taking money away from that great optimizer, the US Government, and handing it back to yucky old individuals who might just save it or pay down debt or something equally silly in the Keynesian world?

**Postscript- to answer a frequent comment I get, it does not matter if it is borrowed or taxed.  Either way it takes money from some private purpose.  There is only so much capital in the capital markets, and more government borrowing squeezes out private borrowing.


  1. Mark:

    In my economics books they say the reason this works is because the government doesn't save. If a bloke were to spend his own $ he would feel compelled to save about 8% the government will take that same $ and spend 300% (as we did in February) But the analysis does not take into account the relatively inefficient use of capital by the government for projects.

    Another factor. If the government actually invested in something new and useful it could provide stimulus. Like say - there is coal in them thar hills but it is hard to get to because there isn't a road which leads to the potential coal mine. Having the government build a road, in this case would create significant stimulus, as the road would be built, and many jobs created at the coal mine. (Why couldn't the company get its own funding for the road - the company might be too small to secure those funds, or be stifled by regulations that the Fed could push aside ...)

    Most stimulus new stuff though, is fixing roads, that already exist, and doing maintenance. They aren't building any Hoover dams with this money.

  2. Will:

    With short-term interest rates so close to 0% there actually is a lot of money sitting around not being productive. There's been a gigantic increase in the excess reserves banks are holding at the Fed. If the government borrows that money and spends it on something moderately useful, we will get something moderately useful (and increased spending, which might have a multiplier effect) at the cost of a tiny distortion in the future.
    Unemployment is now around 10% - we are drastically underutilizing our human capital. If we are letting supply idle, why do you think we are not doing the same to demand?
    Technically everything we do is just moving money from one place to another. And yet the economy keeps growing. How does that happen?
    You have previously frequently said that the problem is that businesses are not investing. If businesses invested, they would just borrow money from people who presumably thought they were employing the money productively.

    Mark: But if roads need to be fixed, they need to be fixed. I certainly trust the government more to rebuild old roads then to figure out where to put the new ones. Industrial policy rarely works.

  3. Mark ii:

    Actually it does make a difference if the money is borrowed or taxes because the borrowed money can be "moneritized", that is new money created. That is why the Keynsian fiscal policy administrations created inflation.

  4. Scott:

    "There’s been a gigantic increase in the excess reserves banks are holding at the Fed."

    The reason banks currently hold about $800 B in excess reserves at the Fed is because the Fed started paying them interest on their reserves. The Fed is doing this to buck up the banks balance sheets. If the banks used the money to make loans, the money supply would increase rather quickly and dramatically resulting in a huge spike in inflation.

    Over time the Fed will sell back the assets they purchased from the banks to create the excess reserves and wind down the position. (At least I hope that's what they do. The alternative is a lot of inflation.)

  5. Scott:

    A note on multipliers.

    In theory, because government doesn't "save" the government spending multiplier should be larger than the tax cut multiplier. When we actually try to measure it, the results are somewhat different. The tax cut multiplier turns out to be a lot bigger and the spending multiplier is less than one. Have a look at the Economic Letter from the Federal Reserve Bank of San Francisco.

    If you don't have time to read the whole thing, just scroll down to the tables.

  6. Will:

    The Fed can create money whenever it wants, it doesn't need Keyensian policy. Right now due to the liquidity trap (the spike in reserves occured BEFORE the fed started paying interest - I think) its ability to act is limited. That is why inflation is so low, and why markets do not expect inflation in the short or long terms.

    Right now the Taylor rule says the target rate should be -5 or so. Interest rates are close to 0, meaning monetary policy is contractionary.

  7. IgotBupkis:

    > *Postscript- to answer a frequent comment I get, it does not matter if it is borrowed or taxed. Either way it takes money from some private purpose. There is only so much capital in the capital markets, and more government borrowing squeezes out private borrowing.


    > Actually it does make a difference if the money is borrowed or taxes because the borrowed money can be “moneritized”, that is new money created. That is why the Keynesian fiscal policy administrations created inflation.

    Well, I was about to make a quip about this reasoning, but Mark beat me to it. Not sure if his is intended as a quip, however, it's not utterly clear from the tone. I think he's amused by the idea, but it's not certain.

    The underlying flaw is the fact that CAPITAL is not MONEY. Money is the substitute for what CAPITAL is.

    The only thing we really, really have in this world is TIME -- CAPITAL is actually human TIME spent doing 'x': eating, sleeping, thinking about polynomial functions, hammering at horseshoes, putting up walls for a house -- whatever it is, it's there, and, depending on the skills of an individual, how productive/destructive it is.

    And this is highly relevant -- put a 6yo in charge of making a cake, chances are you get an inedible mess. Put me in charge you'll get a passably edible result. Put a talented dessert chef in charge, chances are you get a masterpiece of gustatory delight.

    This is one of the numerous inherent flaws in Marxism, it doesn't grasp the value of expertise in the application of CAPITAL towards the creation of WEALTH (Wealth is STORED human time -- ASSETS -- in addition to current CAPITAL). Put Frank Lloyd Wright in charge of a building project, get a masterpiece. Put RuPaul in charge of it, and you'll be sorry. (RuPaul may have talents, but it's not at building -- expertise is important to creating WEALTH).

    One of the flaws in Keynesianism is that MONEY isn't CAPITAL. It's a PLACEHOLDER for CAPITAL(i.e., human TIME). It allows a quick, unconsidered and uncomplicated exchange of human time around the globe -- I don't have to barter with the carpenter for his shelving, trading him my cooking skills, when what he really needs is MASONRY skills, or when what I really need is a new computer. If you've ever seen one of the episodes of M*A*S*H where Radar (or later Klinger) creates this massively complex barter to get something the camp really needs, this is what money saves you from. You each trade for money IN PLACE OF the time, by valuing the services you are providing vs. the money you are getting or giving for them.

    (Sidenote here)*

    This is where the flaw lies -- inflating the money supply does NOTHING to the supply of CAPITAL -- Human Time -- All you do is change the amount of "money" sitting around to take the place of the amount of Capital available. The result is, rather obviously, inflation. The valuation of the money in relation to the human time changes. This can have a temporary effect of appearing to inflate the Capital supply, but people soon realize there is only more money -- placeholders -- floating around and change their valuation of it in terms of their own Capital.


    Follow up: While the amount of human time is generally increasing (and the value left behind is constantly increasing, even if the population weren't), its valuation varies (valuation == the amount of wealth created), depending on the skills involved and the uses to which it is put.

    (see the sidenote) When we were an Agricultural economy, almost all the valuation created was subsequently destroyed -- either it was eaten or the excess food spoiled (it was that excess, however, which allowed time to be spent on "other things" -- mechanical skills, the arts, and so forth -- which slowly increased the wealth to the point where it could seriously impact the human condition).

    When we developed an industrial economy, the amount of spare time not required for basic necessities allowed far more time to be applied towards developing skills and talents that under an Ag Economy were wasted or "un-useful". Further, the valuation of the things produced were more long-lasting than they were under an Ag economy -- the machinery produced lasted years, even decades, rather than a single season or two. Or it greatly amplified the effectiveness of human time -- a weaver could weave far more cloth in the same amount of time than they did before. And the ideas that were developed are still with us, and some of them are still in use or have led to even better successor ideas.

    So the society grew "wealthy". Its ability to provide for the basic needs of humans grew, its ability to preserve life (i.e., Human TIME) in the face of adversity grew further still -- life span grew and infant mortality fell, increasing the amount of capital available and the amount of wealth that could be produced even more.

    Until we get to where we are NOW, which is at an odd cusp point, much like the Great Depression, in which the rules of the game have changed (see the sidenote below, about an IP & Services Economy) but many of those In Charge, and the experts they depend upon, haven't really, fully grasped the new rules involved. Some haven't even figured out that there's a new game at all, and are busy trying to "rearrange the deck chairs on the Titanic" to their benefit.

    Sidenote: When capital is applied to making food, then the food is consumed over time (Consider: Agricultural Economy). When capital is applied to making goods (Consider: Industrial Economy), then that good is sometimes used up over time (for example, auto tires) or it may not be for some types of objects (for example, artworks). When that capital is applied to making ideas and concepts (Consider: IP & Services Economy, which is what the USA has now), then you are making new ideas and concepts. While those may get "expired" by newer ideas and ways of doing things, they don't get used up at all!!!. So what does this say about future wealth as we shift fully into that kind of economy?

  8. Scott:

    The Fed was allowed to start paying interest on reserves on October 3, 2008. They started doing so 3 days later.

    Have a look at the monthly data series from FRED2 on excess reserves.

    Draw your own conclusions. Excess reserves have now reached $1.1T

    Given the last 50 years of data, it appears to me that the Fed can pretty much control how much banks hold in excess reserves. I don't see $1.1T as a liquidity trap. I see it as a deliberate Fed policy.

    Said another way, if the Fed wanted to have those excess reserves turn into money, all they would have to do is quit paying interest on them.

  9. IgotBupkis:

    > Technically everything we do is just moving money from one place to another. And yet the economy keeps growing. How does that happen?

    As suggested above, no, that's not true. What we do isn't about moving money from one place to the other -- it's using the time we have available to us effectively. We move the money about as a substitute for each others' time. Each of us has only a limited amount of time on this earth, and each of us is attempting to use that time to increase our own supply of wealth (as above: Stored human time).

    > You have previously frequently said that the problem is that businesses are not investing. If businesses invested, they would just borrow money from people who presumably thought they were employing the money productively.

    No, that's not how it happens. People have assets (stored time) under their control (businesses are just humans acting in concert with an aggregation of stored time, both that of employees and that of investors and creditors).

    They choose how to apply those assets. Businesses invest by utilizing those assets to produce something which is itself an asset. It provides some of that wealth BACK to the original asset owner in "rent" (i.e., "payroll", "interest", or "dividends" -- some form of recompense for the use of the assets) and utilizes the rest for its own purposes.

    Businesses don't TAKE CAPITAL -- human time -- away from others without direct compensation of some sort (and yes, that compensation can be "negative" in some cases, if the "others" were poorly managing their capital, or undervalued its wealth-creating ability).

    Governments do. You don't get to decide what use you're putting your Capital to. You don't get to decide what is an adequate or effective rate of return on the use of it -- it's just "Fork it over, Pal!".

    Theoretically a government provides some form of compensation -- military services, police services, fire services, court services, "bread and circuses" to distract the masses who might act as overt thieves otherwise -- but such compensation, even moreso in the last fifty-odd years -- can be indirect, unobvious, and/or useless.

    It can also be very poorly effective usage of the capital involved even for desired services -- for some large agencies, it may be better to contract out its police needs to a private agency or take on the responsibility themselves (one noted example of this is Disney. One of the things Disney negotiated with the State of Florida when they built Disney World is that the State police have no direct jurisdiction on the Disney property there. They have their own police/security organization, and neither the FHP nor the FDLE have any jurisdiction, and cannot enter the property without permission from Disney Corporate -- they are, as far as police are concerned, a 52nd state.) Another example -- Halliburton, outside the USA, DOES contract for private military services to protect its operations and personnel in combat areas.

  10. Will:

    Igot: Your analysis is based on looking at the supply side. This is a good idea, however it is incomplete. However, it doesn't explain why so much human time is going idle, as represented by the unemployment rate. The most reasonable explanation is sticky wages. People are irrationally loathe to accept pay cuts. Business owners therefore avoid cutting wages. When inflation is low (as it is now), this can lead to a surplus of labor, as you can see by looking at the supply and demand curves. (Same principle as the minimum wage causing unemployment, actually.) More inflation boosts the economy by solving the sticky wages problem. Government spending does the same thing.

    Scott: Interesting. But they can't stop doing that or it will screw up the banking system. That is only a preliminary response, as I have to look into that more.

    Igot, again: Your first claim comes from looking at the supply instead of the demand side. But in such a situation, Coyote's argument is incoherent. There are vast quantities of unused time currently. That's the problem.

    That's why the government stimulus consists largely of paying businesses to produce goods, using their assets.

    Scott on multipliers who I didn't respond to earlier: There are a number of difficulties with this type of research, which makes the conclusions often uncertain. With time I will be able to respond to that specific study. Assuming we find that there is evidence for both spending and tax cuts, a reasonable idea might be a combination of spending and tax cuts - exactly what they're doing!

    Governments do frequently take capital. Except that they're cutting taxes right now. They are, in fact, borrowing it, just as businesses often do, not taking it.

    Crime-prevention has serious externality issues, which make private law enforcement only viable on large areas of privately owned land, such as Disney World.

  11. IgotBupkis:

    > Crime-prevention has serious externality issues, which make private law enforcement only viable on large areas of privately owned land, such as Disney World.

    I'd argue that some mixture of it can work on many levels, though, not just wide swathes of land.

    I'd concur that it might not work on an individual level, with the possible exception of large collectives that equate to a city or governmental entity in many ways.

    I think modern social/computer networking do make possible decentralized models that would be too ineffective in any hierarchical system. That, by the way, is yet another of the very different aspects of an IP & Services economy. The primary models of Ag. and Ind. economies are inherently hierarchical -- Feudal Enclaves and Corporations are by nature hierarchies for reasons of efficiency. The ideal model for an IP&SE is a network, which does not pass information up and down a chain allowing for bottlenecks and info-flow slowdowns, but interconnected chains of individuals and groups thereof, providing info for all involved that need to know as quickly as possible.

    That might allow for an interesting sort of insurance-style model for police and other emergency services, whereby people pick organizations to pay for a level of service, who then subcontract for a number of people (who may work for more than one company at a time, mind you, on a first-call-first-solved basis) for their time and attention to different security/police problems. And yeah, this would be handled much as schools OUGHT to be handled by a voucher system to provide for basic levels of care/attention, possibly supplemented by the individual for "greater" levels of service and attention. And yes, if you think about it, this multi-level system already exists in the form of private investigators and security on top of existing police. We're just talking about making the whole thing work that way and giving people options over who provides their so-called emergency services. For some people and some areas, mind you, this might actually be a vast improvement. And let's keep in mind here that the idea that these are "government" services is a fairly recent one, developing mostly in the last couple centuries. Prior to that, the only police element was "the king's men" who enforced "the king's rules", which might or might not involve favoring the king and his cronies -- and probably favoring them.... Fires, Water, Ambulance? What dat? The current model is the unusual one in human history.

    > However, it doesn’t explain why so much human time is going idle, as represented by the unemployment rate.
    Misallocations, uncertainties, etc., often caused by governmental mis-manipulations, plus failures of the networking system to connect idle individuals with opportunities to use their time in a societally profitable manner, plus inertia in the system to reassign trained individuals for other tasks their specific training doesn't cover.

    This latter can function in unobvious ways. I am a trained computer professional, but some of my skills are dated. This is less relevant than it appears, as I happen to pick up new concepts markedly faster than most others. HOWEVER, despite that -- at one point, I had been unemployed for long enough that I sought work outside of computers. I applied for a position in a food distribution service (think "pizza delivery", but much more generic, aimed at servicing lunchtime workers) as a manager. The guy who owned the business interviewed me, and openly admitted that he had NO question I was capable of doing the job, and well. He would NOT hire me, however, because he felt that as soon as he'd finished training me, I'd find some higher-paying job working with computers and leave before he'd gotten enough back out to justify the lowered productivity time and distractions of training me. That I'd been out of work for an extended time didn't matter, nor did my clearly acked capacity to do the job. He wasn't desperate enough to make the effort to train me while risking that I might get a different job that paid better. (P.S., attempts to agree to commit to a minimum time frame weren't accepted). So I remained unemployed despite finding a job I was fully qualified and capable of performing. Same time frame -- I found another job that I actually DID get hired for. But I had high blood pressure -- an EASILY treated condition, mind you -- and so they refused to hire me despite my willingness to submit to criteria which would involve treatment and continued improvement in the condition. This was not a directly dangerous job, mind you, but it did involve occasional presence in dangerous areas. And AGAIN I remained without a job despite having found one. In both of these cases, the results tied to, among other things, a degree of government interference in the job market -- one in the form of limited ability to commit to a job by employment regulations, the other a direct result of overzealous application of employment safety regulations (I have no issue with the idea that the HBP needed to be dealt with as a result of job concerns, only that it wouldn't be sufficient to be a probable issue within the narrow range of a couple months it would take to resolve the matter adequately).

    In summary: Demand problems often stem from two areas -- First, direct or indirect government interference with the job market, or Second, systemic inertia and poor information flow between those who have time and those who have needs.

    While I will grant a few exceptions, "if government is the answer, you're probably framing the question wrong".