Friday, January 18, 2008

Remember: The Government Has No Money to Give

Appearing before Congress, Mr. Bernanke told Democrats what he thought they wanted to hear. The former academic economist blessed a "fiscal stimulus package," as long as it is "explicitly temporary." How new federal spending can be "temporary," he didn't say, as if a dollar collected in taxes or borrowed and then spent can be recalled.

We're all for putting more money in the hands of the poor and moderate earners, especially via stronger economic growth that will give them better paying jobs. But the $250 or $500 one-time rebate check they may now receive has to come from somewhere. The feds will pay for it either by taxing or borrowing from someone else, and those people will have that much less to spend or invest themselves. We are thus supposed to believe it is "stimulating" to take money from one pocket and hand it to another.

~Today's WSJ Staff editorial

Not to mention that the transfer of $250 or $500 from rich to poor won't be neutral, it will involve a net loss to the economy, due to the inefficiencies of the transfer, i.e. the "leaky bucket effect" noted by economist Arthur Okun in 1975. According to Okun, "The money must be carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that is taken from the rich."


At 1/18/2008 11:57 AM, Blogger Bret said...

"We are thus supposed to believe it is "stimulating" to take money from one pocket and hand it to another."

If one is attempting to stimulate demand, and the demand based on the contents of one set of pockets is relatively inelastic when compared to the demand generated by the contents of another set of pockets, one can clearly increase demand by transferring the money from one set of pockets to the other.

At 1/18/2008 12:23 PM, Blogger Marko said...

If poor people are given more money to spend on food and gasoline, won't that just increaase demand which will drive up the price of those items? Isn't that how inflation works?

If that is what they want, why not just suspend the federal gasoline tax? Or better yet, point out that Dems continually block drilling more oil in the U.S. and constructing more nuclear power plants. Plus, there is no recession (maybe people are just positioning themselves to claim they stopped the recession when it never comes).


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