Tuesday, January 13, 2009

Modern day Keynes

David Henderson makes a simple point about why infrastructure spending is a bad way to get Keynesian stimulus in 2009 (as opposed to 1909):
What is particularly ironic in this discussion of idle resources is that it is the pro-stimulus Keynesians who ought to be very fastidious in their recommendations for government spending projects. After all, if the whole point is to draw down resources that have been thrown out of work, then care should be taken to tailor the stimulus package for the resources in question. Is it really the case, for example, that bridges and roads require labor and other inputs in the same proportions as housing construction and finance? Does the construction of a new sewer system require the services of investment bankers and roof layers in such combinations that local government spending can perfectly offset the bursting of the housing bubble?

A little price theory, realizing, for example, that not all workers are perfect substitutes, would have gone a long way here.

...What we know is that three sectors that need to shrink are housing, autos, and financial services. And guess what sectors the government is subsidizing.
In the 1930s, there was no infrastructure to speak of, Federal taxes were low, and labor was generally undifferentiated. In 2008, the US has lots of infrastructure, Federal taxes are high, and labor is highly specialized. If Keynes was alive in 2009, he would say that the Government should increase the deficit [G - T] by reducing Federal T(axes) -- ideally via a payroll tax holiday--and not by increasing G.

By contrast, Arnold gets it right, but gets it wrong:
" Facts are facts. The US has already proved it can raise over $1.5 trillion in a single year [in Treasury borrowing]"

That is a the sort of statement that could come back and haunt someone. It is along the lines of the guy jumping out of a building from the 10th floor, passing the third floor and saying, "It's all fine so far."
The US Government does not need to borrow to increase money supply. It can print money. So, the US can print $1.5T, $15T, or $150T without any problem or limit. Talking about the US Government "raising dollars" is nonsensical--who are they "raising dollars" from given that they are the sole supplier of dollars, and they have an infinite supply!?

The "multiplier" is a totally different matter, and Arnold is right to say that the multiplier will fall, and fall quickly as spending goes up.


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