Tuesday, January 27, 2009

The Central Defect of Bailouts and Stimulus Plans

The central defect of government bailouts and stimulus packages is that the money is allocated through a political process. It goes to recipients who have the most political influence. Private entrepreneurs and even big business, by contrast, employ investment to earn a profit. The record shows that the latter yields greater economic efficiency, and hence creates real jobs.

The new stimulus package pays lip service to aiding the private sector with various tax incentives for hiring and investing capital. It acknowledges, just barely, that the private sector will be the engine for recovery if recovery is to be had. But the record for such measures is about as dismal as the one for short-term supplements to consumer income. They do very little to change the decisions or behavior of the recipient. If the recipient is wary and uncertain about the future, he or she will probably remain so.

Socialist economies, where governments decide how to allocate resources, are notoriously less efficient than market-capitalist economies. As in Washington, every politician demands his share. The late Abram Bergson of Harvard concluded that the old Soviet Union -- the ultimate in socialism -- employed capital only about half as efficiently as the U.S. That is one reason the Soviets collapsed from economic exhaustion.

Democrats are putting a lot of faith, to the tune of over $1.5 trillion, in economic policies with dodgy track records. At this time of a new president and great expectations, one hopes the political class will succeed better with massive spending than it has in the past. But don't bet the farm.

~George Melloan in yesterday's WSJ

7 Comments:

At 1/27/2009 12:27 PM, Blogger John said...

Stimulus plans based on spending and lump-sum taxation have a more basic flaw than politics, which we can think of as the economic equivalent of conservation of mass: What the government spends, the government first must take. Economists have known this for decades. The true measure of government absorption of resources is not taxes collected but rather what it purchases. Spend a dollar, take a dollar. Because of that, the only "stimulus" arising from spending and lump-sum taxation reduces welfare. There are two such types of "stimulus." First, there is the reduction in personal disposable income caused by raising government absorption. In response, people may work more to replace some of the confiscated income. That unambiguously is a loss in welfare because we have to count the value of the lost leisure. It also will be only a partial replacement of the confiscated income because people typically respond to reduced wealth or income by both working more *and* spending less. The reduction on spending matches the net reduction in disposable income. Second, if the increase in government absorption is temporary, then it raises interest rates as the government competes for scarce resources. The higher interest rates will induce more labor supply now through intertemporal substitution but then also will induce less labor supply in the future for the same reason. They also will reduce investment now and thus reduce capital and income in the future. The only way spending and lump-sum taxation cause an increase in output is by making people feel less wealthy or by distorting the intertemporal price. Either way, output goes up but welfare goes down. No output is created by any magic, only by distortion, and the multiplier for such actions is less than one. Future output is reduced.

I should add that things are not much different if there unemployed resources because (a) the sectors stimulated by the government actions typically are not the sectors with unemployed resources (right now, for example, the government wants to increase spending on infrastructure, but unemployed automobile workers are not trained to work on infrastructure and so will not be employed there) and (b) there are long lags in the enacting and implementing of fiscal policy that means most of it comes on line well after the recession is over, which means in fact it makes things worse rather than better.

 
At 1/27/2009 1:18 PM, Blogger 1 said...

"I should add that things are not much different if there unemployed resources because (a) the sectors stimulated by the government actions typically are not the sectors with unemployed resources (right now, for example, the government wants to increase spending on infrastructure, but unemployed automobile workers are not trained to work on infrastructure and so will not be employed there) and (b) there are long lags in the enacting and implementing of fiscal policy that means most of it comes on line well after the recession is over, which means in fact it makes things worse rather than better"...

Good stuff John, thanks for that...

 
At 1/27/2009 2:38 PM, Blogger 1 said...

George Melloan's commentary is a good one but I think Walter William's explanation is a bit more forceful and to the point:

Congress' Financial Mess

'News media people, often plagued with little understanding, fail miserably in their duty to inform the public. This is particularly evident in their reporting on the current financial meltdown, suggesting it was caused by deregulation and free markets...

Hence the reason for the confusion of trying to explain this massive Ponzi scheme to the taxpayer...

 
At 1/27/2009 9:44 PM, Blogger The Intellectual Redneck said...

We all know the help Acorn gave the Democrats in winning the last election. What was in it for them? Is 4 billion dollars enough?
Democrats attempt to pay off Acorn

 
At 1/28/2009 9:44 AM, Blogger wcw said...

For 'intellectual redneck' I see I can read the usual politics of 'nigger, nigger, nigger.'

The GOP needs a new playbook.

 
At 1/28/2009 1:01 PM, Blogger 1 said...

Leave it to socialist liberals to depend on the lie since the fact always undercut their stance...

wcw whines: "For 'intellectual redneck' I see I can read the usual politics of 'nigger, nigger, nigger.'"...

Is this an attempt to divert attention away from voter fraud and Democrats and how they go hand in hand?

The Complete Guide to ACORN Voter Fraud

wcw, yet another liberal...

 
At 1/30/2009 9:48 AM, Blogger wcw said...

Oh, big man, get it through your thick, little head: I am way to the left of US liberals. But that does make me a natural opponent of today's far-right GOP, so I welcome your thickheaded antipathy. Here's hoping your party runs the same campaigns in the future it has in the past. It's better to be ruled by center-right Eisenhower Republicans (i.e., today's Democratic 'liberals') than by whatever lackwit you'd like to see in office.

 

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