Wednesday, March 10, 2010

Why Economic Stimulus is Pointless

And how minimum wage laws do more harm than good. Also, why Paul Krugman is an idiot. From 'Underconsumption is not the problem':

The problem in our economy is not that we are “producing too many goods,” or that “people cannot buy back what is produced” because they are not paid enough, or that government has not flooded the economy with enough new money. No, the problem is that much of the structure of production has been geared toward generating projects that cannot be sustained.

The only way that the economy truly can recover is for us to permit these malinvestments either to be liquidated or be directed toward other, sustainable lines of production. Instead, the government tries to throw new money at us and claim that we just are not spending enough.

That’s a prescription for disaster.
Keynesians would have you believe that the problem with our economy is that there are too many goods and not enough buyers, and that with a large enough stimulus we could take up this economic slack, and kickstart the economy back to life.

The problem is that economic slack, or 'underconsumption,' does not cause recessions, but is rather a symptom of a malinvested economy. The problem is not that people are not buying the fruits of production, but rather that production is making things people don't want.

By 'stimulating' the economy, we merely put off necessary shifts in production. We do not allow unproductive firms to fail and be liquidated, and we do not allow successful firms to use that excess capital to rise up.

Economic recessions are a sign of changing times. We can fight against them, but doing so is as useful as trying to stop the tide from coming in. Instead, we must learn to flow with recessions, to allow capital to move from one industry to another, freely and quickly, so that we can reorganize our economy quicker, and get back to business faster.


  1. I agree with most of your analysis, but I think that making this about Keynesian economists is silly. Our "malinvestments" are not the product of Keynesian economists; they are the product of poor policy by both Democratic and Republican Presidents and Congresses.

    Our economy is so driven by consumption by our own citizens that during a recession, you do need to throw money into the system to fill the demand gap. However, we'd be better to (as you write) "allow capital to move from one industry to another." We don't manufacture anything anymore. I think we need to hone in on clean energy -- the hottest 21st century industrial sector -- and use it as the engine for a new economy.

    A clean energy focus will create new industries, new jobs, new exports, correct our trade imbalance (half of which is because of imported oil), and allow existing businesses to produce their products more cheaply (as they spend less on the energy-related production costs). We just need to make the right investments to spur this growth. If we create the proper incentives for clean energy, the private sector will take off and produce products that our nation and the globe will want to consume. Expanding exports and righting our trade imbalance will make us much less susceptible to recession.

  2. To incentivize clean energy, our nation needs only to tax oil and coal more heavily. If necessary it could be sold as 'budget neutral' if it were offset by payroll tax cuts. This along with government sponsored technology research should provide a solid platform for sustainable energy to emerge.

  3. Isn't it a little hypocritical to say that our current system inhibits growth and capital formation because of government sanctioned industries, when promoting clean energy in the manner you propose is doing just that? Clean energy is not a strong enough technology (not efficient, profitable, etc. enough) to enter the free market as an entity unto its own, so you propose making a hole in the market and bolstering it so it can be competitive. I'm not saying you're wrong, I'm just saying your proposal "fixes" the problem with the exact same kind of actions that caused the problem in the first place.

    Also, while overproduction might be an issue, but our economy is so supply reliant (sensitive to any shift in supply) if we simply decrease production, GDP falls, investor confidence falls, and the economy tumbles...then the multiplier effect comes into effect.
    Say we decrease supply instead of artificially inflating demand. well that decrease in supply means cutting workers, and in turn, their ability to consume. Therefore, the economy stagnates more, so we have to cut supply more, cut more workers, and fewer people are again able to consume. This multiplier effect is why the government economists prefer to stimulate consumption rather than decrease supply.

  4. You're absolutely correct, and I absolutely prefer a hands-off approach to the economy. I was simply offering a simple compromise to Raven and other liberals who seem hell bent on green technology. I simply see a carbon-tax as the least-worst manner in which to encourage green energy. Also, I tend to prefer consumption taxes over income taxes in general, so the idea is a compromise.

    Also, I would love to study an example of the supply-decrease-spiral you described. Has this happened in other countries? or is it theoretical?

    Consumption stimulation seems to me like it produces short-term, unsustainable gains, hence why I am not a fan.