Some Thoughts On Saving The Economy

from the that-interest-isn't-special dept

The NY Times Magazine is running a well worth reading (if long) article on the question of what sort of efforts are needed by the government to help “save” the economy. While almost anyone (myself included) will find points worth quibbling about in the article, there’s a lot of good points made that are worth reflecting on in more detail. The key point is understanding the difference between just creating more jobs in the short term and actually creating sustainable economic growth that will make it possible to pay off our debts in the future (and more).

As the article notes, if you just want to create jobs, you put people to work digging useless ditches. That creates jobs, but it does little else to stimulate the economy — and, in fact, can do plenty to hinder future economic growth by inefficiently allocating resources. It’s Bastiat’s old Broken Window’s Fallacy of inefficiently allocated resources. The problem, though, is that the folks who are most interested in making sure those resources are allocated inefficiently, are in the best position to make that happen. And that’s incredibly dangerous. The article refers to Mancur Olson’s theory of how stable and affluent nations decline and fall. The NY Time’s summary is a good one:

Successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods.

While the article is right about trade barriers and tariffs, don’t get hung up on just those. It applies in numerous other ways as well. The healthcare system (which the article discusses in great detail) is a disaster based on a series of rules and regulations that have inefficiently allocated healthcare resources. Our entire healthcare system is a ponzi scheme, of sorts, based on ignoring the very basic lessons of moral hazard — where we’ve totally separated the actual costs from the actual payment for healthcare, and created a massively inefficient bubble that encourages bad spending on the wrong things, rather than work towards keeping people healthy. Pile on top of that a bad patent policy that diverts massive funds from actual healthcare into drugs without recognizing that the two are not the same thing, and you have a massive problem that doesn’t get solved overnight. And, of course, we’re not even discussing policies that work hard to actually artificially limit healthcare providers…

But, while the article paints some positive pictures of some of what the new administration is doing (and saying) — and I’m thrilled with what some of the administration folks are talking about, there are way too many examples of things going in the other direction. We’ve already covered the broadband stimulus plan — which really does look like a huge gift to incumbent players. When pushed on that, Obama’s transition guy, Blair Levin, defended it in exactly the way you’d worry about based on the above, saying that the short term focus was on creating jobs, not solving the wider broadband question. The problem is that in creating those jobs in the short-run, they’re likely harming overall economic growth in the long run.

Then there are additional things that are troubling, such as the decision to include “buy American” clauses in the stimulus. This is the sort of thing that is often demanded by folks who have little understanding of economics, but plenty of understanding about how things appear politically. Buy American sounds good, but in this case it actually does plenty to harm the American economy — as it did in the last Great Depression. When the American producers are a lot less efficient, the end result is that we end up spending more and getting a lot less for our taxpayer dollars. That hinders growth (significantly, in some cases) and actually does plenty to damage the American economy. It also falsely boosts the incumbent providers bottom line (see above, again, about those special interests) and doesn’t get them to adjust and adapt to the changing market in a timely fashion. Even worse, it often pushes other countries to retaliate in ways that make our economy even worse off. It’s a terrible policy and it does significant harm to our economy.

I still remain unconvinced that a massive government spending plan is necessary, but given that’s the route we’re clearly going down, all our focus should be on making sure that the choices made within that stimulus package are not focused on protecting any particular industry or company, but in creating platforms and infrastructure that allow anyone to compete and contribute to economic growth. To date, there’s little evidence that this is actually happening, and that’s scary.

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Comments on “Some Thoughts On Saving The Economy”

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Evil Mike says:

Re: Buy American is Good

“It is often better to keep one’s mouth shut and be thought a fool than to open it and remove all doubt.”
-Benjamin Franklin (and he was quoting somebody else too!)

PS Go take an economics class or three, repeat the the class until you pass with an “A” AND you understand that which you’ve purportedly learned.

PPS -You fucking dolt.

Xiera says:

Re: Buy American is Good


We are a trade deficit country because we have lost most of our manufacturing base (because overseas labour is cheaper). Then businesses in the U.S. buy manufactured products from abroad because they cost less.

The American people benefit from this because they don’t have to spend as much money on the products, which means they can spend money on other products or services.

The problem is that workers in other parts of the world aren’t playing by the same rules as American workers — they don’t have unions trying to dictate high pay. (I’ll grant that unions were once extremely important in making sure that American workers were not being exploited, but they’re harming us more than helping us now.)

Additionally, we’re seeing more and more Americans getting their college educations. This artificially increases their cost to employers, creates an artificial lower threshold for what jobs are desired, and lowers the supply pool for those jobs (which in turn raises cost for hiring someone for those jobs). This leaves businesses with the option of paying the higher costs or seeking other supply pools with lower costs. It’s an easy choice.

So, really, when we see all our jobs being exported to China or India or Korea or wherever else, we only have ourselves to blame.

Anonymous Coward says:

Re: Re: Buy American is Good

“Additionally, we’re seeing more and more Americans getting their college educations. This artificially increases their cost to employers”

So how many people can raise their expertise before the burden equals the one crated by paying exec salaries?
Its not the people, its the few, the greedy, the dirt bags.

Xiera says:

Re: Re: Re: Buy American is Good

It’s both.

“The few, the greedy, the dirt bags” are no different than the rest of the employed.

Once upon a time, management was paid a salary. Maybe they enjoyed certain benefits, but they usually owned the company and were personally invested in its success. At some point, ownership and management became divorced — split into separate functions. In order to lure the best management professionals to the company, owners would have to provide incentives — including “golden parachutes” and whatnot.

Your everyday average worker has a parallel. Once upon a time, they were paid wages (or salary). At some point, worker supply exceeded demand and companies had to provide incentives (like benefits) in order to lure the best workers.

Over time (and this applies to both groups), as the supply:demand ratio leveled, these things became *expectations*, not added benefits, and so additional measures were required if your company wanted to hire the best of the best, creating a positive feedback loop that has spiraled out of control.

Anonymous Coward says:

Re: Re: Re:2 Buy American is Good

There is no way a single person is worth hundreds of millions of dollars a year.
You can argue till you are blue in the face and throw books and pamphlets at me but you will be wasting my time.

If society had any balls we would end the existence of these leeches and move forward with better days.

Xiera says:

Re: Re: Re:3 Buy American is Good

Actors? Athletes? Musicians?

You’re right, these people may not be worth that much, but that’s what the market is willing to pay them. You don’t have to like it, I don’t have to like it, but there’s really nothing either of us can do about it.

Unfortunately, it’s impossible to “end the existence of these leeches” because we’ll always need people to manage companies. And let’s not make the mistake of making blanket statements — just because some of these executives are unethical crooks does not mean that all of them are. Some of them *gasp* make honest mistakes. Some executives are actually great for their companies and employees (L.L. Bean, for example).

Don’t get too caught up in all the hype surrounding the few unethical executives to the point where you are no longer thinking rationally — it interferes with positive discussion.

Twinrova says:

Re: Re: Buy American is Good

“because overseas labour is cheaper”
Therein lies the problem with the current economic crisis.
Our labor isn’t “cheap”, it’s expensive, so much so, companies can no longer afford to hire. Now that this economic crunch has hit world wide, companies saving a buck on American labor are closing because their cheap overseas laborer just went out of business as well.

I’m all for another “Great Depression”. I believe this is the only thing which will refocus the American people and businesses that costs are just getting way out of hand.

A small business has a much higher failure rate today than just a decade ago. The costs of operations, 401k contributions, and health care make it damn near impossible to stay afloat. And this is what the American people expect from a business.

No offense, but where in hell does it say a business must supply to your retirement? Sure, it’s nice, but isn’t retirement your responsibility, and not the business?

I won’t even touch health care costs. If you’re paying for it, you know how expensive it is (and keeps getting more expensive). By law, businesses must offer a health care plan.

Every day, I overhear the news stating yet another business is closing its doors. Does this mean they couldn’t compete? Nope. It simply means the supply and demand chain broke, and the business can no longer survive.

American’s aren’t buying as much as they have been. Fears of job loss, explosive interest rate increases, and other factors prevent them from doing so. If the American people don’t feel confident in the economy, you can bet they’re not going to spend (and thus, can lead to their own job loss).

I’ve said this time and again, there’s no damn reason why a loaf of bread should cost more than $1. I know why it does, and it’s this reason businesses are closing left and right.

And having the US Government throw money at a problem definitely doesn’t make it go away, but instead, opens chances for many to take advantage of a “give away” plan when they don’t need it (right, GM?)

Stimulus indicates a jolt to a system, but never has it been a solution. Stimulating a heart may jump start it, but it’s ultimately the body’s responsibility to keep it pumping. Jolting the heart repeatedly does nothing to help it, merely damage it.

Whether or not you believe the economy will fall, you can bet the fallout from all this is going to take much longer than 2009 to correct. 2015 is more reasonable, especially given that history shows the “Great Depression”‘s fallout was helped with a world war. Otherwise, it would have taken at least a decade to get back to normal.

Now, even with our trillions of dollars, all we’re seeing is how future politicians will see that throwing money at a problem was a very, very bad idea.

No business can prepare for what’s coming. Without sources (supplies) and income (demands), it’s just a matter of time before doors close.

No one is buying because they’re too damn worried about losing their overpriced job to pay for that loaf of bread costing more than a dollar.

Welcome to the massive failure of Capitalism.

nasch says:

Re: Re: Re: Buy American is Good

I’ve said this time and again, there’s no damn reason why a loaf of bread should cost more than $1. I know why it does, and it’s this reason businesses are closing left and right.

I think I’ve asked you before and not gotten an answer (though without notifications of responses it’s hard to keep up with conversations on this site): why should a loaf of bread cost only a dollar? What mechanism could exist that would ensure this would be the case without screwing up other aspects of the economy?

Twinrova says:

Re: Re: Re:2 Buy American is Good

“why should a loaf of bread cost only a dollar?”
Actually, the loaf of bread should be much, much less than a dollar.

“What mechanism could exist that would ensure this would be the case without screwing up other aspects of the economy?”
The better question would be “What other aspects of the economy screwed up the mechanism in the first place?”
One thing Techdirt has shown me is the word “greed” shouldn’t be thrown around too often, as it’s usually said unjustly (“greedy” CEOs, for example). They’re right. But, the mechanism which influenced the cost of bread can be directly related to greed in this instance.

A few months ago, Techdirt wrote about the statements made by Bank of America regarding American demands in the work place. Why it pissed off so many, I’ll not understand, because I actually agreed with the statement. Americans have become demanding, or in this case, greedy.

But it’s not entirely the fault of the worker, but more towards capitalism which instills this “demanding” attitude towards business, which must either accept the demand or do without and fail.

Back in the 50s, a medical, dental, and retirement plan was unheard of. People woke up, went to work, and came home, often leaving the wife to tend to the children.

Here, in 2009, it is nearly impossible to leave one parent at home unless an exceptional salary is made by at least one. Many American citizens can be described as living “middle class”, or just downright poor. In fact, less than 5% of the population in this country is considered “wealthy”.

To make matters worse, most Americans must place themselves in considerable debt in order to maintain the three necessities in life: food, shelter, and clothing.

So, how does a $1 loaf of bread factor in all this? Simply put: it doesn’t cost $1 to make a loaf of bread. It costs $1 to manufacture a loaf of bread.
The cost of employees and benefits is passed to the consumer. However, these manufacturing costs are rapidly exceeding the salary wage component which is needed to purchase the goods.

This is a serious issue with capitalism. One must stop and ask “Why is a loaf of bread so expensive now?” I’m sure the company would love to sit back and reduce employee salaries, drop the benefits, and simply produce bread. But it can’t. The “industry” set forth the “demands” of employees, which is why you will rarely find a business not offering these benefits, along with an “industry standard” salary.

Now, every business is tied together much closely than ever before. 401k benefits are now tied to the market, so it’s very dependent on the successes of other businesses. Without these successes, 401k plans lose considerable value.

In addition, health care costs continue to explode (unnecessarily) because businesses running health care insurance continue raising rates to cover these explosive costs, even going so far a limiting the very benefits we come to expect from our insurance.

The current economic market proves how extremely sensitive businesses are to each other. If many get “hurt”, the fallout continues down the chain to every other business tied to it. We’re going to see this in action for the next several years and very well may fall into another “Great Depression”. It’s like a wheel on a hill. Once it gets moving, it’s damn near impossible to stop due to the force behind it.

I’ve always had an issue with a company which generates more profits than it can use. Sharing these profits in terms of higher salary wages only perpetuates this expectation to other businesses to “compete” for workers, and if that business can not compete, it goes out (there are documented cases in which this tactic was used in a competing market and is still used to this day).

The other fallout is the goal towards a monopoly. We read about it every single day in which companies take questionable action to maintain their status in the business world. Monopolies are illegal in this country (although I can not fathom why), but every damn business strives for this “king of the hill” position which ultimately closes other businesses.

This type of goal is the very essence of greed. While some will argue this isn’t a bad thing because it tends to lead to better lifestyles of its workers, I will most definitely disagree.

Because, with this economic crisis, “middle class” is becoming extinct. People have lost millions due to business collapses in the market. Prices are rising, not falling, because profits are being lost and a business is struggling to stay afloat. The supply and demand chain is showing its weakness as a business supplying yesterday is gone today, leaving competitors to raise prices because they can.

When this economic mess is all over, the cost of living will be much higher than it was before. That $1 loaf of bread will now be $2, and costs across the board will be much higher than ever before. Why? Because we, the people who are suffering now, are going to demand more to ensure we’re ready for the next time this mess happens.

And it will happen. It’s guaranteed. When capitalism offers the ability to make more for doing less, people are always going to jump at the opportunity, regardless of risk.

There is a solution to fix this, but people won’t accept it. They won’t accept it because they’ll always expect more, especially when they feel they’ve “earned” it.
This is why I won’t state the solution, because people would simply refuse it without realizing its potential.

So, I’m sorry I won’t answer your question regarding the mechanism. People aren’t ready to accept it. But here’s a hint: If you read closely my reply, the answer should jump out at you.

Enjoy, and have a great day. 🙂

Xiera says:

Re: Re: Re:3 Buy American is Good

Very well written and I agree with many of your points. There are a couple issues I see though.

For one, I can’t comment on the price of producing bread (making or manufacturing), but the price of producing milk (making or manufacturing) is actually more than the selling price of milk — those companies actually lose money. This makes it easier for me to believe that bread really might be that expensive to produce.

We need to, as a society, separate the terms ‘wealthy’ and ‘rich’. There are many people that fall into the former category that do not fall into the latter category. These people are the ones — the doctors, the lawyers, the engineers, etc. — who still have to “make ends meet”, so to speak, even if they’re more able to do so than many of us. What I think sickens most of society is the ones that are truly rich, many of whom contribute very little to society. (Now would be a good time to recognise the athletes that give back to their communities. They’re less sickening, at least to me.)

I still insist that *most* of the increased costs in healthcare can be traced back to the popularity of malpractice cases — ie, suing the people who are trying to help you. Healthcare providers need to protect themselves against unscrupulous patients (yes, some people actually go *looking* for malpractice suits) by purchasing malpractice insurance. This is a cost of business and, not surprisingly, is passed on to the customer — the insurance companies. Of course, they aren’t going to recognise that cost either, so they pass it onto us, the consumers.

Companies generating more profits than they can use shouldn’t be the problem — the problem should be how those profits are utilised. If they’re used to reward hard-working employees, how is that a bad thing? If they’re used for research and investment, how is that a bad thing? If they’re used to pay back investors, how is that a bad thing? It becomes a bad thing when the additional funds are used in a way that does not encourage company growth.

Define “middle class”. I’d be interested to hear how you define this.

The problem is that we (as consumers) continue to buy more than we need at prices that we cannot afford. For individuals, the problem is credit — we can spend money that we don’t have. (This is very different from loans, where the object of the spending often serves at collateral.)

You bring up a *great* point about people wanting more to prepare for “next time”. I think this is very true and it’s because people see the small picture and think in terms of the present; we don’t always see the big picture and don’t like to think about the future, which really isn’t guaranteed.

Are there potential alternatives to this system? Yes. Would they work? Well, that would require experimentation. Even the best theorycrafting by the brightest minds would not be able to guarantee the success or failure of a proposed economic system.

That said, I would be very interested in what you have to suggest.

mobiGeek says:

Re: Re: Re:3 Buy American is Good

it doesn’t cost $1 to make a loaf of bread. It costs $1 to manufacture a loaf of read.

Interesting statements, but your argument COMPLETELY ignores the most important angle of this discussion: the CONSUMER.

You say that the “cost” of a loaf is less than $1. But what are you basing that on? As a CONSUMER, my time is valuable to me and I’m willing to pay someone else money to make something that I personally can’t be bothered making.

If a loaf of bread has a VALUE of more than $1, then its PRICE will tend upwards. And this is the case.

When the price of bread becomes too high for the average consumer (i.e. they value the savings they’d get by making the bread themselves), then and only then will the market adjust and find efficiencies to bring the price of that manufactured goods inline with expectations.

I can make the bread cheaper myself. I could by flour, water, yeast, and roll-it, pat-it and mark-it-with-a-B. But I simply can’t be bothered with it.

I can invest money in a bread machine and make bread myself (short term higher cost for long term savings), but again at current prices it isn’t enough to cause me to adjust.

So the price of bread is what it is, and I as a consumer am supporting that price.

Your comments about companies making more profits than they “should” is also interesting. It again means that the consumer base is supporting a price far exceeding the cost of the goods/services. But is this an individual company’s fault? Should the company drop prices because its products are selling so well? Is this realistic? Should government step in? There’s some very slippery slopes in those questions.

The only thing that really jumps out at me in your reply is that you have a lot of loosely related emotions pent up around the current economic environment, and you aren’t able to take the time to reason through your feelings (“I’m sorry I won’t answer your question”).

Xiera says:

I’ll set aside bemoaning the political pork in the so-called stimulus package for the time being.

Let’s say the final bill is focused on job creation — that they cut out all the pork. Taking a look at the propositions in the bill, it *will* create jobs.

Unfortunately, and I can’t say this enough, the jobs it creates will be *temporary* jobs that will disappear when the respective projects have completed. This might stimulate the economy temporarily and in certain markets, but will do little to create long-term economic growth.

The government doesn’t seem to understand that their biggest economic strength is *incentive* (much like the Fed). They can encourage businesses to hire, and to invest in research and capital. And using these mechanisms, *policy*, not spending, can lead to long-term economic growth.

The difficult part is figuring out how to provide incentives without creating false appearances in certain markets.

Big Mook (profile) says:

Pork disguised as stimulus

We should stop describing these spending packages as economic stimulus.

A highway bypass in Cleveland, TN isn’t going to help anyone except a handful of contractors in and around Cleveland, TN who’ll pocket most of the cost as profit, and most likely they’ll use immigrant construction crews who’ll most likely send their pay back home to Mexico. Sorry if that sounds racist, but you haven’t been to a construction site in the southeast US if you think it’s not true.

$100 million for the National Endowment for the Arts? Yeah, that’s really going to help John Q. Public. I hear fresh oil paintings taste better with salt and pepper, and it’s a great colonic to boot.

We could go on and on.

This bill is rife with just this kind of pork barrel stuff. If you believe in faeries and rainbow ponies, then you’ll believe it will have a favorable impact on the US economy. If you’re a realist, then you know that this spending package will fill the purses of business owners while temporarily creating a few construction/specialty jobs, with a lot of that money simply trickling overseas in the end.

But, even with all the utterly ridiculous foolishness in this bill, it will pass thanks to our new Democrat majority and the lord and saviour Obambi (praise be unto him).

Hail Xenu!

Killer_Tofu (profile) says:


Successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods.

This just made me think of the RIAA. I know I am not the only one …
I know it applies to other groups as well, but the RIAA was the first group to spring to mind.

Ima Fish (profile) says:

if you just want to create jobs, you put people to work digging useless ditches.

I always thought that the real reason you pay someone to dig useless ditches was to keep them out of trouble.

In other words, if the economy is in the dumps and you have a large population of people who cannot find any work. You can either give them nothing to do, which means they’ll have nothing to do, which means they’ll almost certainly get into trouble.

Or you can give them something to do. They’re happy because they feel they’re being useful. And best of all, they’re too busy to get into any trouble.

Essentially, these governmental work programs are cheaper than jail and prison.

Ima Fish (profile) says:

Re: Re: Re:

The PDF you linked to talked about the economic basis against government paying for useless ditches. I completely agree with that. It is not economically efficient to do so.

But what is your solution to keep a large and unemployed population from rioting, stealing, raping, overthrowing the government, etc? (I’m talking about the great depression, not what we’re facing now.)

Like I said, you could wait for them to commit crimes and then have them arrested and put in jail or prison. Or, you could pay them peanuts digging ditches.

If the unemployment conditions are right, and were certainly not there yet, I think the useless ditches are a better solution than than crime and prison.

Steevo says:

Long-term planning

I think the thing that annoys me the most is that most (all) politicians, and government in general, aren’t thinking big picture. They’re all just thinking about the next election. Almost nobody in government wants policies that last longer than 2/4/6/8 years. This country has been around for 200+ years and hopefully will be around for another hundred or so. The people in government should think in those terms where legislation is concerned.

They don’t want to build an Ark. They want to build a raft.

C. says:


The industrial revolution among other things did produce a LOT of “jobs”. What are we producing now? Every year, every day, technological applications reduce the required number of “necessary” people. So at what point does (if we haven’t reached it already in “developed countries” ) this become a situation where you have to pay people not to work. “Digging holes” is not a long term solution but what political leader would be willing to look at future “employment” other than another Macjob approach no matter if the economy is DOA or booming. We are approaching that point every minute. Yes we need to stop the bleeding right now and I agree that longer term solutions would be better regardless of the short term pain but then what?

F says:

Re: Job's???

I believe the idea that “machines” or “technology” will end up taking people’s jobs has been proven to be fallacious time and time again (since the industrial revolution, in fact). Each time, the labor has shifted toward the creation of other products and services.

Now it may be that at some time we will run out of things to consume – we’ll all be so happy that everyone will have everything they could possibly want, but I doubt it’s happening anytime soon.

Future Boy says:

Re: Job's???

Well, when your economy is based upon profit and all profit is measured in fiat money (correctly pronounced as “worthless”) then of course the increase of automation makes you feel threatened.

It’s very sad to see these dark days first hand, the history books barely do them justice.

Don’t worry, after a few bloody world-wide revolutions, a few new countries manage to start resource based economies and things start to get better from there. Sadly, the exact dates of these events has been lost.

Also, if you’re in the “Central Banking” business, you may wish to find a new line of work. Said bankers were some of the first up against the wall.

MAtt says:

let them fail

My favorite analogy to our economic situation is this: we have a compound fracture in our leg, and the government is repairing the punctured skin and creating a leg brace that will enable us to walk without having to set the break in the bone.
The government isn’t trying to fix the economy. They are trying to ensure the people will need government as a crutch.
My message to the administration and congress: Let people fail! Bailouts don’t teach us the lesson we need to learn.

mobiGeek says:

Re: Re: let them fail

Yes, this is a Democratic plot. Unlike the Republican bail out plan (how much was that exactly?).

And under which party did government spending eclipse previous spending, before even considering bail-out spending?

C’mon, surely we’re old enough here that we can look beyond the paint-them-red/paint-them-blue arguments and have reasoned discussions…

Xiera says:

Re: Re: Re: let them fail

Very true. There seemed to be a new wave of Republicans during the Bush administration that weren’t fiscally conservative. Here’s to hoping they find their roots.

By the way, shout out to the so-called Blue Dogs (fiscally conservative Democrats) for voting against the stimulus package in the House. It’s a shame more of your association didn’t follow suit.

Xiera says:

“ONE GOOD WAY TO UNDERSTAND the current growth slowdown is to think of the debt-fueled consumer-spending spree of the past 20 years as a symbol of an even larger problem. As a country we have been spending too much on the present and not enough on the future. We have been consuming rather than investing. We’re suffering from investment-deficit disorder.”

This is probably one of the best points made in the article. It’s kinda looking at opportunity costs in a new light: you’re sacrificing future spending for current spending. The problem, obviously, is that eventually you won’t have the ‘future’ to worry about and it becomes someone else’s problem. I’m all for loans (business and personal), but the idea of freely spending non-existent money is what got us into trouble in the first place. And now the government wants to use that same policy? Now is not too early to start looking at the history we’re making.

Xiera says:

Re: Re:

“Tucked away in the many statistical tables at the Commerce Department are numbers on how much the government and the private sector spend on investment and research — on highways, software, medical research and other things likely to yield future benefits. Spending by the private sector hasn’t changed much over time. It was equal to 17 percent of G.D.P. 50 years ago, and it is about 17 percent now. But spending by the government — federal, state and local — has changed. It has dropped from about 7 percent of G.D.P. in the 1950s to about 4 percent now.”

Exactly how much of that 7% of GDP was spent on research and investment in nuclear weaponry? compared to now? Just throwing numbers around doesn’t help readers understand what is going on.

Xiera says:

Re: Re: Re:

“Governments have a unique role to play in making investments for two main reasons. Some activities, like mass transportation and pollution reduction, have societal benefits but not necessarily financial ones, and the private sector simply won’t undertake them. And while many other kinds of investments do bring big financial returns, only a fraction of those returns go to the original investor. This makes the private sector reluctant to jump in. As a result, economists say that the private sector tends to spend less on research and investment than is economically ideal.”

Very true. In fact, if the government spends the entire stimulus on R&I in areas that the private sector won’t touch because there’s no financial incentive, that’s all the better for us. Unfortunately, that’s not the case with this bill…

F says:

Two issues

Economic growth is synonymous with higher production, which generally has two main components: labor and capital. Economic growth in the face of competition also places a requirement on efficiency, which requires labor to be competitively productive, i.e. cost-effective, and generally adds a third component: infrastructure. E.g. Without doubt our nation would not have been as competitive in the last 50 years w/o the national highway system. However, because of the well-known issue of the commons, market forces alone tend to not address many infrastructure issues.

So, the stimulus package has to walk a fine line of investing in infrastructure that will make us more competitive down the line, but which generally takes a long time to plan and execute, and providing for jobs in the short term. Not easy.

However, I completely agree with the author vis-a-vis interest groups, and as an ardent Obama supporter, and uncomfortable with his appreciation of how big a problem this is.

Xiera says:

Re: Two issues

Infrastructure is indeed one area where we should be investing spending — it’s the other areas that I have a problem with. Infrastructure includes highway and railway systems, but also power and water grids. Obama’s next-generation green power initiative is a great way to stimulate job growth across different levels of income in a way that will last.

Economic growth is NOT synonymous with higher production — that’s one of the reasons the auto industry is experiencing problems. Economic growth is derived from higher consumption, not production.

It’s nice to see an ardent Obama support take a step back and look at what’s wrong with this bill, not just what’s right with it. Kudos.

C. says:

re F.

I,m not concerned about “machines” taking everyone’s jobs. I am concerned about this insane rush to create “jobs” with little or no consideration than “getting people back to work” and the political motivation to lower “unemployment figures”. More people, more jobs? What kind of jobs? I’d like to hear some opinions about the direction we’re going.
The “other services”. I believe the “production” aspect of created employment is a diminishing return.

Mogilny says:

Stimulus Package = Government Bailout

It seems like more and more the “stimulus package” is a bailout for the different levels of government. The new administration is taking this opportunity to write themselves a check to patch government deficiencies and programs instead of job creation and planning for the future.

As for buying American, I haven’t bought anything made in the states in a decade (with the exception of software). What is it that they want people to buy? Cars?

Xiera says:

Maybe Malthus had it right ... to a degree

For those who don’t know, Thomas Malthus believed that humans are not capable of infinite growth due to the constraint of a limited food supply.

Applying that idea differently, what if the economy is not capable of infinite growth due to the constraint of a limited job supply? The article hints that history has proven this not to be true, but I’m not sure that’s the case.

The first question, then, is whether there is indeed a limited job supply? Of course, entrepreneurship can create jobs (and is often the best source of new jobs), but is there a limit? I would argue ‘yes’. Each new company displaces, to some degree, other companies already in the industry. Unless the industry as a whole grows (ie, the Silicon Valley boom), one company’s success creates more jobs for it, but has no net effect on the industry.

Furthermore, the economy as a whole is limited by demand, which, in turn, is limited by gross national income. So, it would seem, that one industry’s rise indicates another industry’s fall — in other words, that the size of the whole pie remains relatively constant.

So if there is indeed a limited number of jobs in any economy, is it possible for that economy to grow infinitely?

I would say ‘no’. The exception, of course, is when the economy is experiencing a trade surplus. But even then, there is a limit. Just considering one country’s pie, it is possible to approach (but not reach) infinite growth for a limited period of time. That growth is limited by the larger economy — the global economy in this case.

Operating under the principle that the size of the pie remains relatively constant, it would be nearly impossible for the global economy to experience notable growth or decline — as one national economy falls, another rises. As one global industry falls, another rises. (It actually operates in reverse — one nation or industry rises, causing the fall of another — but the point remains the same.)

So while we may be able to temporarily boost our economic growth (relative to other nations’ economic growth), it may not be sustainable at the level we all expect, especially as newly emerging economic powers (China, India, Brazil) take larger chunks of the pie than previously. Maybe the problem is that our supply pool of workers is too large for the number jobs in a sustainable U.S. economy. Maybe Malthus had it right.

hegemon13 says:

Re: Maybe Malthus had it right ... to a degree

Given that your entire argument hinges on one conjecture to “prove” a string of other conjectures, you haven’t really said much.

It’s funny that you include an example (the silicon valley boom) of a huge simultaneous growth of technology, jobs, and innovation, yet you proceed to refute it. It really has not been that long since the silicon valley boom in a historical concept. When the next world-changing industry comes to light and the next economic revolution happens, we will see it again. I would agree that continuous infinite growth is impossible. Rather, it happens in fits and spurts. I don’t see any evidence suggesting that there is an upper limit to the size of the economy, but major mistakes like we have made in the last 50 or so years can certainly bring it crashing down as quickly as it grew.

Last, your argument is as fundamentally flawed as Malthus’. Just as innovation has steadily increased food supply, so can it increase jobs. The only limiting factor is space on the planet, which innovation could also solve if someone could figure out terraforming or interstellar travel.

Xiera says:

Re: Re: Maybe Malthus had it right ... to a degree

Right, so in the case of the Silicon Valley boom, the innovations in the new-found industry edged out older ways of doing things. The impact was not immediate in terms of our lives, but it was pretty quick in historical terms.

You’re right that the next world-changing industry will produce this effect again: the new industry will edge out older industries that used to perform the same function. There will be an overall negligible net job change.

An economy can only grow as large as demand allows it to grow, which in turn can only grow as incomes grow. So while an individual economy or industry may notice explosive expansion, that’s usually an indication that another economy or industry is experiencing or will experience a major collapse. Again, the overall net job change would be negligible.

I’m not convinced that Malthus’ argument was flawed; he just failed to take all factors into consideration. His claim was that human population grows exponentially while the food supply grows arithmetically. Even if you account for human innovation, this still holds true.

So say food production increases from x, x+1, x+2, … to 10x, 10x+1, 10x+2, … due to some incredible innovation, population growth is still going to overcome it.

In the case of my argument, innovation cannot create new jobs, it can only replace old ones. Again, this may happen immediately or over time, but the net change in jobs still approaches zero.

mobiGeek says:

Re: Re: Re: Maybe Malthus had it right ... to a degree

So say food production increases from x, x+1, x+2, … to 10x, 10x+1, 10x+2, … due to some incredible innovation, population growth is still going to overcome it

As populations become wealthier, they tend to drop their rates of reproduction. Most 1st world countries now are no longer reproducing at self-sustaining rates.

Xiera says:

Re: Re: Re:2 Maybe Malthus had it right ... to a degree

Right. Most western countries have stabilized populations or even declining populations (numbers-wise). (This means that the birth rate does not exceed the death rate.)

But much of the world, particularly places that are unable to create as much food, still have steep population growth. I’m not one to advocate active population control, just saying that he might have been right about this one. Especially considering that he was right given the world at his time.

Mike (profile) says:

Re: Maybe Malthus had it right ... to a degree

Applying that idea differently, what if the economy is not capable of infinite growth due to the constraint of a limited job supply? The article hints that history has proven this not to be true, but I’m not sure that’s the case.

For a good look at why this is totally untrue, take a look at Paul Romer’s research, which we’ve summarized before. Economic growth is not limited by food or people — it’s ideas. And those are endless.

Xiera says:

Re: Re: Maybe Malthus had it right ... to a degree

Firstly, I was just theorycrafting, looking for any feedback. 🙂 So thanks to yourself and hegemon.

I’ll have to take a look at that. While ideas may be endless, the means by which to realise those ideas are not. Those means include demand (which is limited to a degree by consumer capital). Of course, the consumer has to make a decision to spend their capital on X or Y or neither. While this isn’t exactly the Broken Window scenario, the same premise holds true: capital is a limited resource — the consumer has to make a decision about what he will spend his capital on.

Although, we could probably spend all day pointing out all the poor assumptions in my reasoning…

Mike (profile) says:

Re: Re: Re: Maybe Malthus had it right ... to a degree

The key summary of Romer’s work:

Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.

Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding. Possibilities do not add up. They multiply.

Xiera says:

Re: Re: Re:2 Maybe Malthus had it right ... to a degree

That all makes sense. I completely agree that there will always be new ideas and that each new idea will generally be better than the old ideas.

As I re-read my arguments from yesterday, I’m having a hard time backing them with anything substantial… which probably is not a surprise for those who have commented on them. (When I get an idea, I tend to run with it before thinking it out completely… you know, like patent hoarders.)

But economic growth has to come from somewhere, does it not? Economic growth is the result of increased capital entering the economy, presumably because of increased demand for something coming out of that economy.

There are a limited number of ways that I could see this actually happening:
people who saved capital yesterday are now using it today, and thus there will be less capital to use tomorrow, causing stagnation;
people are using capital from tomorrow (credit) today, and thus the economy will experience a recession tomorrow (of course, the alternative is that people continue spending tomorrow’s capital, which ceases to ever be realised);
or the government is injecting new capital into the economy, which really isn’t a sign of economic growth at all, is it?

To be honest, I probably just missed something in my understanding of economics.

Overcast says:

In a nutshell thats what the liberals do to the economy, (republicans too just a lesser degree), Its all about the short term. The longest a politician can generally think into the future is 8 years.

That and it should be clearly evident by now that the interests of ‘the people’ and the interests of the politicians are usually at odds.

Giving money to banks, car makers, self-interest groups, and the like will do little, if anything to fix the problems now. Putting more money in the hands of the people who actually make it work (consumers) would fix the problem – but obviously; that’s not the goal.

Carla Hein says:

Find the war profiteers.

Money doesn’t evaporate—it gets transferred. If we want to find where our money went, let’s pull our troops from Iraq and invade Cayman Islands, Bermuda, Lichtenstein, Panama and Switzerland and force offshore bankers to publish the name, address, phone number, company title and amounts of money hidden in a secret numbered account. We want our money back!

Anonymous Coward says:

I think the Economic Crisis is nothing but a big hoax! If you actually take the time and think to yourself its all happening because of people who are getting scared. So when people tend to get scared they do stupid things or they get nervous and run away. In this case people did a stupid thing and started going on the news and telling the nation that we are going bad in the economy and got other people scared as well and just started an avalanche. If no one ever said anything about it our economy would be great as it still is. Its just that when people get something in there head than they tend to go with it and keep it.

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