Saturday, February 07, 2009

Anti-Stimulus Trifecta

Its no secret that I think that all of the various economic stimulus plans are simply a bad idea. None will work, and in my opinion will make any recession or depression longer and deeper, not shorter.

Over at the Foundation for Economic Education (FEE), they have 3 excellent pieces that do an excellent job at refuting the "Stimulus Madness!" that has gripped governments not only on both sides of the border, but around the world:

1. My friend Sheldon Richman's The Goal is Freedom: Smoot and Hawley Return shows how the infamous "Buy American" portion of the package is merely a repeat of Herbert Hoover's ill-fated Smoot-Hawley Tariff, widely accepted as one of the causes of the speed and depth of the great depression.

"When laws prohibit or limit the purchase imports, foreigners have fewer dollars and therefore fewer opportunities to buy American exports or to invest. The Americans who would have benefitted from those transactions lose out. So while protectionism is defended as a way to help the American economy (at the expense of foreigners), in fact it is special-interest legislation that helps only a small well-defined interest group at the expense of many other Americans. If people generally understood this, they would not fall for protectionist appeals."


Its odd that for all the daily comparisons to the depression we are seeing, no one seems to have noticed that the US Congress and President Obama are acting more like Hoover than FDR (not that acting like FDR would be much better).

2. William Anderson questions the very idea of government spending - especially bailing out failing companies and industries - to create jobs in his Not So Fast!: The Fallacy of Production for its Own Sake:

"...jobs simply are a means to the end of consumption; they are not ends in themselves. People become confused because they fail to recognize the connection between production and consumption. Yes, jobs produce income for individuals, but they can provide real income only if the job contributes to the production of goods people are willing to purchase."


So simple an idea, yet something that few people get.

3. And to shore it all up, FEE links to an article first published in 1957 (warning: PDF), an excerpt from economist Frederic Bastiat's classic 1850 Pamphlet That which is seen and that which is not seen.

"From all the benefits attributed to public spending we must deduct all the harm caused by preventing private spending—at least if we are not to go so far as to say that James Goodfellow would have done nothing with the five-franc pieces he had fairly earned and that the tax took away from him; an absurd assertion, for if he went to the trouble of earning them, it was because he hoped to have the satisfaction of using them. He would have had his garden fenced and can no longer do so; this is what is not seen. He would have had his field marled and can no longer do so: this is what is not seen. He would have added to his tools and can no longer do so: this is what is not seen. He would be better fed, better clothed; he would have had his sons better educated; he would have increased the dowry of his daughter, and he can no longer do so: this is what is not seen. He would have joined a mutual-aid society and can no longer do so: this is what is not seen. On the one hand, the satisfactions that have been taken away from him and the means of action that have been destroyed in his hands; on the other hand, the work of the ditchdigger, the carpenter, the blacksmith, the tailor, and the schoolmaster of his village which he would have encouraged and which is now nonexistent: this is still what is not seen."

I'm quite sure my stance will not make me popular with my progressive friends, but I cannot support an orgy of spending, a return to long, deep deficits - no matter how well intentioned - when the effect will be the opposite of what is wanted. Sometimes, perhaps, we should rely on sound economics rather than wishful thinking to help people.

Right now, the road to economic hell is being paved with gold by the very governments trying not to.

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14 Comments:

At 8:31 PM, Blogger Tom North said...

Over at econlog a couple of days ago Bryan Caplan noted:

"You do not have to be dogmatic to take a staunchly pro-market position. You just have to notice that the "sophisticated" emphasis on the benefits of intervention mistakes theoretical possibility for empirical likelihood."

Kinda goes with your post, I think. Probably should be called the "Caplan Postulate" or something.

On your popularity with your progressive friends due to your stance all I can say is that lack of ability to think in an economic manner is hardly limited to the left. It seems to be rather pervasive across a large chunk of the political spectrum.

 
At 8:44 AM, Blogger Greg said...

I have to disagree with on one point, even though I generally agree that the stimulus package is unlikely to work.

That point is protectionist tariffs. The U.S. economy is failing because Americans don't produce enough. They've exported all of their manufacturing to China and they don't themselves export enough to pay for it. I realize that the Chinese are fiddling with the American dollar, but that's really beside the point. If a nation doesn't produce (including software, entertainment, whatever) enough to pay for the things it buys, it has to print money. Eventually people stop taking that money.

You'll have to explain to me how the U.S. can possibly survive if it doesn't find *something* to produce that someone outside the country wants.

You'll also have to explain why it's a good idea to force workers in Canada and the U.S. compete with what amounts to slave wages in other countries.

 
At 11:20 AM, Blogger Mike said...

Greg,

"If a nation doesn't produce (including software, entertainment, whatever) enough to pay for the things it buys, it has to print money"

Except that printing fiat money doesn't produce wealth out of the air, it produces inflation in prices, as each unit dollar in circulation is now worth less because the supply is increased. How does driving up inflation fix this? It doesn't - it makes the costs of both consumption and production higher, which makes people call for more protectionism and leads to the printing of more money etc etc...

"You'll have to explain to me how the U.S. can possibly survive if it doesn't find *something* to produce that someone outside the country wants."

Well it can't, but I am unable to understand how protectionist tariffs will suddenly make these things appear. As Peter Schiff has said on many occassions, this stimulus package is about making people consume, not produce - all the stimulus money will go to either paying down current debts held by companies or individuals or to buy those very things produced in other countries, rather than producing them in the US. No one is even thinking of encouraging import replacement.

You'll also have to explain why it's a good idea to force workers in Canada and the U.S. compete with what amounts to slave wages in other countries.

And yet throwing up protectionist barriers has only served to create giant, stinking stagnant industries who are still failing. The Auto Sector is a perfect example - there are huge protectionist tariffs against Japanese and Korean cars, and yet these cars are still outselling the US made ones not just on cost, but on quality and innovation. Protectionism shuts down trade and competition. Without trade and competition, there is no innovation. See GM, Ford and Chrysler for the result.

North American workers will compete on quality and the ability to change on a dime, not just on price. The issues in the Auto industry are not caused by high union wages, but by porr management decisions created due to a lack of real competition.

The protectionism we have already suffered through in North America has subverted Schumpeter's "creative destruction". That is, instead of free competition in which old companies and industries that fail to keep up to technology and demand either change or die out to make way for new industries and companies to take their place, old out-of-date business practices, business models and labour relations have been allowed to rot and fester. What under the former would have been quick and relatively painless changes will now be long and hard changes, but they will be changes none-the-less.

It rather goes to William Anderson's point - why is tax-payer money and protectionist tariffs going to help a terribly out dated auto industry, for instance? That would have been the equivalent of state protection for buggy whip manufacturers a century ago. After all, shouldn't stable workers and buggy whip makers be protected against the new automobiles? Haven't they worked hard? What will they do if they cannot make buggy whips? What will America produce if it cannot continue to make stables and carriages?

I think you see my point.

 
At 4:25 PM, Blogger Tom North said...

Greg:

There are several fundamental errors in your comment:

The first, a common enough error, is that “US, Inc” or “Canada, Inc.” simply does not exist. The Canadian economy is not a corporation headed by the Government of Canada. People, individual economic actors, acting in their own interests, buy stuff. The trade surplus (or deficit) is nothing more than an accounting summation of the total of these actions over a particular period.

The second flaw is that a trade deficit is somehow bad and must be paid for by the production of “stuff” to export in order to pay for the “stuff”imported. The other side of the trade accounts is the capital account. Foreign actors, acting in their own self interest, may choose to invest in, say, the US rather than simply acquire goods in exchange.

The US has run a trade deficit for almost all of it's history. Conversely, it has been the place of choice for foreign actors to invest their holdings of US currency. This constant, and consistent, investment of capital in the US economy has been a large factor behind the incredible increases in the productivity of US firms, and workers.

Another error is your assertion that the US no longer produces enough “stuff”. In fact it is very important to separate employment in manufacturing (declining), manufacturing's share of GDP (declining), from manufacturing output (increasing). The graph here:

http://www.federalreserve.gov/Releases/g17/revisions/Current/revchart2.gif

should give you a clearer picture of the state of output of manufacturing in the US.

Mike's comments regarding buggy whips is apt, in this instance. To take the point a bit further, look at the large decline in the importance of agriculture at the turn of the last century. Incredible increases in productivity enabled a huge increase in production while, at the same time, freeing up millions of workers whose effort could now go to the manufacture of cars, airplanes, radios, refrigerators etc. All things pretty much only dreamed about in the largely agrarian society of the time.

Productivity in manufacturing has gone the same route. More and more “stuff” is produced but requiring fewer and fewer resources. This has freed up millions of workers whose effort can now be expended in the service industries, entertainment, electronics etc all of which were things only dreamed about by anyone in the 1950's.

Some other sector, in the future, will also see large improvements in productivity. No, we don't know which one any more than anyone could have predicted the changes in agriculture and manufacturing in the time immediately preceding these changes. But, when it happens, it will once again free up millions of workers whose effort will then be applied to things we, now, can only dream about.

An economy is not a corporation, a “Canada, Inc.” It is an ecosystem. Which, of course, is why top down “intelligent design” makes no more sense as a way to handle an economy than it does as an explanation for the complexity of the human animal.

 
At 4:31 PM, Blogger Mike said...

Which, of course, is why top down “intelligent design” makes no more sense as a way to handle an economy than it does as an explanation for the complexity of the human animal."

Another Michael Shermer fan I see?

;)

Great comment Tom, and needless to say I agree.

 
At 11:13 PM, Blogger Greg said...

Okay, for one thing, I already agreed that printing money isn't the solution. Neither am I defending N. American auto companies or the stimulus package. Let's be clear, at least, where I *don't* stand.

But Mike, I think you made my argument for me. It's not about protecting certain industries (auto, buggy whips, etc.) as this encourages poor quality work and lagging tech. It's also, on the flipside, not about denying the validity of all protectionism. If not for that, the U.S. would still be making nothing but cotton.

What it is about, as far as I'm concerned, is levelling the labour playing field. There is no sense, except a short term, greedy robber-baron sense, in which it is a good idea to employ people at slave wages in another country while firing workers here. People aren't labour saving machines for other people and shouldn't be exploited as such.

Tom, this comment surprises me: "The US has run a trade deficit for almost all of it's history. Conversely, it has been the place of choice for foreign actors to invest their holdings of US currency."

Choice?

The U.S. has used its military to force the U.S. dollar upon the world as the petro dollar. Nations and actors that do not wish to reinvest their money in to the American economy get bombed. Pretending that a continuous trade deficit is viable because of American history seems a pretty weak argument. Do you have an example of another country for which this has worked?

This is a house of cards based on the threat and reality of military aggression, not sound economic theory. The subprime crisis was created to attempt to prop up this house of cards a little longer. It, too, is failing.

Tom, I don't know how to read that chart in relation to the trade deficit, so I'm not sure how it matters. I'm not sure what counts as industrial production.

My belief, just so we get this straight, is that the ability to pay for the goods consumed by Americans has been artificially propped up by both military aggression and illegitimate loan practices. Americans can not continue to live the lives they have lived if their military no longer enforces international acquiescence of slave and near-slave labour in other "client" countries.

Simply put, something has to be done (or undone, as may be the case) so that this dependency goes away and the U.S. produces more than services for itself while taking in an unbalanced amount of goods from others.

 
At 8:26 AM, Blogger Mike said...

"It's also, on the flipside, not about denying the validity of all protectionism. If not for that, the U.S. would still be making nothing but cotton."

Well, I disagree with that assertion. Protectionism is never valid. The US would have developed all kinds of industries - and in fact did do so - without the kinds of protectionism that is being contemplated now. They had both the natural resources, human resources and the freedom to let different business try and fail - innovation occurs when that happens.

The U.S. has used its military to force the U.S. dollar upon the world as the petro dollar. Nations and actors that do not wish to reinvest their money in to the American economy get bombed.

While a bit simplistic, this does have a tinge of truth to it. But such has only been true since the end of WWII - the US existed for nearly 175 years before that without marching doing so. In fact, it was proudly isolationist and STILL was a leading economic power (not THE leading power, but a very strong power).

My belief, just so we get this straight, is that the ability to pay for the goods consumed by Americans has been artificially propped up by both military aggression and illegitimate loan practices. Americans can not continue to live the lives they have lived if their military no longer enforces international acquiescence of slave and near-slave labour in other "client" countries.

Exactly right, and what I (and Tom I believe) are saying is the solution to this situation is not to artificially produce "stimulus" to keep it all going or to throw up protectionist trad barriers with will hurt in the long run, but to let it all run it s course and let it collapse, if that is what is needed. When the US can no longer afford to have a military the size of all other militaries combined, they won't be able to enforce all of those treaties and obligations that favour them. They won't be able to prop up friendly autocrats. They will need to innovate to find new industries and products to base their economy on.

Protectionism won't encourage new industry, it will merely perpetuate the old unsustainable ones. And it won't help workers, because it will drive up the price of goods from foreign nations. That is bad for both domestic and foreign workers - one can't afford to buy and the other can't afford to sell. This will lead to a spiraling downward of economies around the world - this is what Smoot-Haweley did to actually trigger and accelerate the Great Depression, not prevent it.

Without protectionism, cheaper foreign goods will come in, allowing those with jobs to buy more. Those industries that cannot compete will die and their resources - including human resources - will be retooled for other purposes.

Stimulus will, at best, merely perpetuate the stagnant status quo. At worst, it is a corporate raiding party emptying the treasures for generations to come - theft pure and simple - that still won't work to help average people and workers, who aren't the ones getting the money.

 
At 10:05 AM, Blogger Greg said...

U.S. military intervention is much older than WWII. "War is a Racket" by Maj. Gen. Smedley Butler indicates that it goes back much further than that.

As well, protectionism has its place as a reaction to subsidization (e.g. the Haitians should really protect themselves against our grain dumping) And if people in other countries are allowing their workers to be slaves, it should be considered labour dumping and the same principle out to apply.

I think we agree on the solution, which is not this stimulus package. The stimulus will probably just make things worse. As Schiff put it, it's just another heroin hit for the addict. The solution will probably come anyway as a result of the stimulus - the devaluation of the American dollar. At that point, things will have to rebalance. Americans will be able to buy less plastic crap and will have to make more of their own.

 
At 5:48 PM, Anonymous Flash said...

Interesting stuff - I'm interested in how people see this all playing out. I can't confess to knowing a whole lot about it, but hearing all these different argumants is helping. Thanks.

Heh.
"Smoot"
Heh.

 
At 9:25 PM, Blogger Tom North said...

***sigh*** ...where to start....

Greg:

I am probably going to be doing nothing more here than repeating myself (and probably repeating Mike's points as well, however.....I will give this another shot.

"It's also, on the flipside, not about denying the validity of all protectionism. If not for that, the U.S. would still be making nothing but cotton."

If I was asked to write the definition of protectionism it would probably go something like this:

protectionism: a means by which the politically connected are able to insulate themselves from market realities, have it enforced by the state, and paid for by everyone else. Usually sold to the voting public using appeals to patriotism or other emotionally loaded rhetoric.

Protectionism is always, I repeat always a bad thing. Regarding Haiti, to use your example, the fact that some poorly paid worker can perhaps purchase some minor luxury for himself because he didn't have to spend all of his meager income on locally produced higher priced grain is somehow a bad thing and is something to be forbidden by the state?

“Pretending that a continuous trade deficit is viable because of American history seems a pretty weak argument. “

Nowhere have I argued that a continuous trade deficit is viable because of American History. I thought I had argued that a trade deficit was nothing more than an accounting entry. Yet, perhaps I was not as clear as I could be on this point. If one were to read in the newspaper the words “Record Trade Deficit!” the general tone of the article would likely be that this is a bad thing. If one were to read in the same newspaper “Record Capital Surplus!” one would likely get the feeling that this is a good thing. Yet, in point of fact, they are the same thing. A trade deficit, by definition, equals a capital surplus, and a trade surplus equals a capital deficit. To only see the trade-in-goods side of the equation and blithely ignore the trade-in-assets side of the equation is to leave oneself with only half an argument. You appear to be saying that the American economy cannot continue along it's present course, among other reasons, as it doesn't produce enough “stuff” to pay for the “stuff” it imports. Yet you appear to have completely ignored the possibility that foreign holders of American currency may wish to invest in assets within the American economy rather than purchase consumption goods.

“I don't know how to read that chart in relation to the trade deficit, so I'm not sure how it matters”

You indicated that the US production of “stuff” was in decline. I provided a graph indicating this is not the case. I did not relate it to the trade deficit – oops, sorry, capital surplus.

“Nations and actors that do not wish to reinvest their money in to the American economy get bombed.”

I would likely be the last to condone foreign adventurism by Americans. I also do not excuse the British, French, Russians, Argentines, Chinese and anyone else who considers armed interference with another nation save in self defense. Your statement is, however, disingenuous, at best. I would suggest that you have it completely backwards. The main trading partners of the US, in descending order, are: Canada, China, Mexico, Japan, Germany, United Kingdom, South Korea, France, Saudi Arabia and Brazil. This list also corresponds, more or less, with the largest foreign investors in the US. My recollection is that you have to remove Mexico and Brazil and add Luxembourg and the Netherlands. But, as I am doing this from memory I could be a bit off. So long as we discount that little dust-up in the 1940's there are few, if any, bombings happening to this group by Americans, nor threats of any. As a general rule, the more we trade the less we fight – the old Guns and Butter argument. If, at some point, you wish to create a list of those who “got bombed” for the crime of not re-investing their money in the US I would appreciate it. If such a list were capable of being produced, and I think it unlikely, one would probably find that the recipients of the bombing were not the types to consider the possibility of engaging in free trade as a means to getting along with their neighbours.

To repeat, I am most certainly not an apologist for American adventurism. They have been involved in numerous wars, skirmishes, invasions etc over the course of their history for reasons which are suspect, at best. I simply doubt their involvement was for the reason you provide.

“My belief, just so we get this straight, is that the ability to pay for the goods consumed by Americans has been artificially propped up by both military aggression and illegitimate loan practices. Americans can not continue to live the lives they have lived if their military no longer enforces international acquiescence of slave and near-slave labour in other "client" countries.”

I'm going to leave out any commentary on your military aggression as economic support argument mostly due to the fact that military aggression is always a loss, even if you are victorious. It is, essentially, the Broken Window fallacy on steroids. Whether a country or citizenry recognize it as such is immaterial.

More important to the current economic downturn is the rather poor loan practices you mention along with the various derivative and other instruments which essentially derived their value from the loans themselves. In this, I am fairly sure that Mike and I are in agreement. This mess has to collapse completely. The market has stated categorically that the business model of the investment banking system is no longer viable and has to shrink to a fraction of its former size. The market has stated that the business model of the “big three” is no longer viable. The market has stated that housing is overvalued and overstocked. The government solution? Bail out the investment banks and the automakers and throw a bone to homeowners and the housing industry. This is, in no uncertain terms, insanity. To move forward resources have to be re-allocated by the market into their most productive use. This can only happen by first freeing up non-productive resources in order that they be made available for more productive uses. Bailing out non-productive resources enabling them to remain in place is the equivalent of the farmer eating his seed-corn. “Stimulus” is the first cousin to “Protectionism”. As with protectionism, it is and always will be nothing more than a massive wealth transfer to the politically connected at the expense of everyone else.

The talking heads go on and on about the Great Depression of the 1930's. A more pertinent study would be the Great Depression of 1921.

 
At 10:12 PM, Anonymous Anonymous said...

>Nations and actors that do not wish to reinvest their money in to the American economy get bombed.

That assertion can't be taken seriously. Who has been bombed for failing to come back to the US with USD in hand to buy American?

A trade deficit is not necessarily a problem. It means by definition that people are obtaining more bang for their buck. That is why protective tariffs amount to being a self-inflicted wound, and why it makes sense to unilaterally drop trade barriers even when the other guy isn't playing fair. The sellers on the other side of that deficit eventually have to do something with their profits, which means that money is going to come back - even if it passes through several other hands if the currency happens to be broadly accepted (as the USD is). Otherwise, the seller - or the last guy who chooses to just hang onto the dollar - just gave you something and got nothing in return.

Where it becomes problematic is when the sellers come back to buy your assets.

Brad Sallows

 
At 10:21 PM, Blogger Mike said...

"In this, I am fairly sure that Mike and I are in agreement. This mess has to collapse completely. The market has stated categorically that the business model of the investment banking system is no longer viable and has to shrink to a fraction of its former size. The market has stated that the business model of the “big three” is no longer viable. The market has stated that housing is overvalued and overstocked. The government solution? Bail out the investment banks and the automakers and throw a bone to homeowners and the housing industry. This is, in no uncertain terms, insanity"

We are indeed in agreement.

And I think I need to do a nice post about the Depression of 1921...the one no one has ever heard of.

 
At 10:13 AM, Anonymous olaf said...

Mike,

And I think I need to do a nice post about the Depression of 1921...the one no one has ever heard of.

Yes, I would enjoy that, as I am myself ignorant of such an event. Now, if I may move on to a personal hobbyhorse:

There is no sense, except a short term, greedy robber-baron sense, in which it is a good idea to employ people at slave wages in another country while firing workers here.

If I could only use one word to express the degree to which I disagree with this statement, it would be: AAGGEHHHHRRRAAA!!!!

First of all, ask any development economist, and they will tell you that factories are very good things for developing countries. It is the proverbial first step on the ladder, and it is absolutely essential. How did China lift so many out of extreme poverty? Hint: it wasn't through an initial mass infusion of Starbucks and yoga studios - but those things are now coming.

The problem in developing countries, which I have witnessed first hand, is that there are not enough jobs, not that the jobs are too shitty or too poorly paid. In the absense of sweatshops, people have no jobs, no money, no future. See this, for example. Interestingly, no one is forced to work in these factories, and yet they do, en masse. Why? Because it's better than all other opportunities.

It is also a good thing for Canada, as it allows our economy to move forward and become more productive, as Tom and Mike have described above.

But please, if you want to rail on about losing relatively unpopular jobs in Canada, please do not use terms like "slave labour" so as to make it sound like you have considered the best interests of the developing world.

 
At 9:22 PM, Blogger Greg said...

Okay, let's start with Haiti.

Haiti has almost no production to speak of. It's been overrun and abused for, what, two centuries now? The moment the people come close to electing a government that wants them to get healed and educated, someone steps in under "Responsibility to Protect" and knocks the government over, shuts down the university and wipes out the Parliament and Supreme Court. Immediately, trade barriers are dropped, corporate taxes are dropped and farmers - the only real livelihood available - are undersold by subsidized grain. Cash out. Welcome to "Austerity Measures". Shortly thereafter, everyone is starving because they've sent all their money away and the farmers didn't have the money to maintain their crops.

If you were in charge of Haiti, watching foreign governments dump grain in to your country, knowing this would lead in a few months to the starvation of your people once the reserves of cash were gone and the local farmers were broke, what is your solution? What then? A slave-wage worker-abusing factory will be along in a moment to scoop up the leftovers?

As for client states. Take South America. Do you know what the difference is between the good and bad guys in Colombia? It's not the drugs. It's where they spend their drug profits. The term is "threat of a good example" and it applies to any service country which tries to use its money for the good of its own people. Why do you think they put a guy like Pinochet in charge of Chile, or Saddam Hussein in power in Iraq? No threat of a good example.
http://www.thirdworldtraveler.com/Chomsky/ChomOdon_Example.html

And I will never accept any such justification for foreign slave labour. You can't run a country in to the ground, as was done to Grenada, Honduras, Nicaragua, Haiti, Vietnam and numerous others and then pretend your offer of piss-poor labour is some kind of magnanimous boon of the free market.

I do not, and will never, trust the free market to take care of people. The free market specifically leaves out of any of its equations any value on human life, health or happiness. If it's cheaper to kill 100 people a year than fix your exploding car, the free market will kill the people. The only way a corporation ever can take such things in to account is if we make laws to force the issue and carefully enforce them (and prevent Bush and his free market cronies from defining a human life as being worth exactly $250 000).

"Capital Surplus". That's an interesting of saying "we have lots of stuff", isn't it? You certainly can't mean "Market Capital", which would be the opposite. Money went out - it was printed, fabricated - in exchange for stuff. Nobody wants the stuff back. China can't send a repo man. I'm baffled if you expect me to believe that the U.S. can simply keep printing money to keep stuff flowing in to the country.

 

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