Friday, January 18, 2008

Remember: Government Has No Money to Give, II

And Government's "Transfer Bucket" Leaks:
The standard stimulus package doesn't change incentives. It's a check from the government. The hope is that the receiver will spend it. But when you just send out checks from the government, whoever gets stimulated is likely to be offset by someone who gets unstimulated.

The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they'll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn't get any deeper.

And even the people who get the money often save more of it than they spend.

That's why stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician's approval rating.

~From George Mason economist and
Cafe Hayek blogger Russ Roberts on NPR, transcript available here

Bottom Line: Despite what the media, general public and politicians seem to believe, there simply is no such thing as government money. For the government to send out tax rebates to one group, they have to: a) raise taxes on other groups to get the money, or b) borrow money from other groups to get the money, meaning there cannot be any net positive stimulus, as Professor Roberts suggests above. It's merely a coerced government transfer of funds from Group A to Group B, making one group better off at the expense of the other group.

The only comment I would add is that the transfer of water from the deep end of the pool to the shallow end in Professor Roberts' example is done with government's leaky and porous bucket (pictured above), so that the pool actually loses water overall and becomes smaller at both ends!


At 1/18/2008 11:10 AM, Anonymous Anonymous said...

Then all these people with all this new money go out into the market and bid up the prices of goods. Sounds inflationary to me.

At 1/18/2008 11:22 AM, Anonymous Anonymous said...

I agree with rebate problems and the leaky bucket theory. Rebates are like someone stealing your wallet, taking $100 out, and the next day giving you back $80 after deducting their “expenses or leaking bucket.” Or worse yet, giving your $100 to someone else. Either way, why would anyone think this is a good idea? On second thought, I guess someone who is getting someone else’s $100 would like the idea.

We could always try out rebates on our own without government interference. Just roll your window down while driving down the road and start throwing $100 bills out and see how well the economy operates afterwards.

At 1/18/2008 12:58 PM, Anonymous Anonymous said...

walt g:

nicely put.

At 1/18/2008 1:41 PM, Anonymous Anonymous said...

i finally agree with you!

i just wish bush would have realized this, as he ran deficit after deficit during his admin. tax cuts are great, but you still have to have budget restraint.

At 1/18/2008 1:45 PM, Blogger Trevre said...

I agree with everything you have stated in this post. I think you should also add that wealth is always being created. If the water in the pool is wealth, then there is a garden hose running into it(representing the wealth being created). How fast this hose runs depends on how wisely we invest our wealth in upgrading the pump supplying the water to the garden hose.

So if the government can take some water out of the pool, invest it properly into upgrading the pump, then the economy and total wealth will continue to grow. The real point we need to be debating is what should the government be investing in, if anything at all.

At 1/18/2008 1:58 PM, Blogger juandos said...

"i just wish bush would have realized this, as he ran deficit after deficit during his admin"...

And the other Presidents didn't?!?!

"tax cuts are great, but you still have to have budget restraint"...

Budget restraints? How about getting rid of the socialist nanny state crapola foisted on us by LBJ and Congress under the guise of the war on poverty?

At 1/18/2008 3:10 PM, Anonymous Anonymous said...

What about the argument that some people are more likely to use the rebate for consumption (as intended) compared to those who wouldn't? Meaning, that current deficit spenders and those with lower incomes are more likely to spend the rebate immediately for consumption compared to wealthier citizens (who are more likely to engage in activities that don’t have immediate benefits- investing and saving).

I'd appreciate it if anyone could point out the mistakes in this reasoning. I'm still a new student of economics.

At 1/18/2008 4:38 PM, Anonymous Anonymous said...

"the people who buy the government bonds have less money to spend and that offsets the stimulus."

That be foreigners for the most part. The only reason the US can get away with this is that the dollar is the worlds reserve currency. When this comes to and end, and it will, the empire will fall.

At 1/18/2008 4:52 PM, Anonymous Anonymous said...

Anon. 3:10

The discussion comparing different types of spending seems misleading. One can either spend $100 on groceries or invest the money by putting it in the bank or buying stocks. Either way, this money is staying in the economy unless one takes one's money offshore or hides it under the mattress.

Which $100 dollars creates a greater social benefit? $100 spent on groceries helps one family. $100 invested is used as financing capital which thereby leverages its social benefit.

The long term tax study carried out by the Congressional Budget Office has confirmed that capital gains tax relief and business tax relief stimulate economic growth while many other forms of tax relief do not.

In terms of the GDP of the U.S., government stimulus is similar to trying to put out a forest fire with a squirt gun. It therefore would seem that one should try to look for the most effective, lowest cost method of trying to stimulate the economy.

Sending $100 checks is one of the most expensive and least effective methods of stimulating the U.S. economy. It is amazing that politicians believe that they can buy people with their own money.

At 1/18/2008 6:03 PM, Anonymous Anonymous said...

anon 4:52 said:
"It is amazing that politicians believe that they can buy people with their own money."

It doesn't matter what the politicians believe. It's what the people believe. The politicans just want votes and they really don't care how they get them.

At 1/18/2008 6:36 PM, Anonymous Anonymous said...

This is very unscientific, but I work with seven other people; they all thought tax rebates were a good idea today. In fact, some of them are already deciding how they will spend the money that the government is “giving” them. I think it’s a bad idea and said so. I’m pretty sure if I were running for office, I would have only received one vote today (my own).

At 1/19/2008 11:59 AM, Anonymous Anonymous said...

I agree that the government has no money to give.

I disagree that it is like trying to raise one end of a pool with water from the other end while using a leaky bucket.

A government give away of our money comes out of our pool but will mostly raise the level of water in our communist business partner's pool in Red China. ;)

At 1/19/2008 11:08 PM, Anonymous Anonymous said...

Anon. 11:59

Spoken like a true mercantalist.

Adam Smith answered the same argument several hundred years ago.

At 1/21/2008 4:37 AM, Blogger Tom Hanna said...

If what's being rebated is a portion of an actual cut in marginal rates or even simply pushed through alongside a cut in marginal rates, it doesn't have to be borrowed or taxed elsewhere - we're still on the right hand side of the Laffer Curve.

At 7/26/2008 3:47 AM, Anonymous Anonymous said...

Good Job! :)

At 8/18/2008 8:49 PM, Anonymous Anonymous said...

Seems to me like the pool is overflowing. The pool needs to be drained, filtered and backflushed, drain all the alage and CRAP and CRUD!


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