Instead of implementing stimulus packages, if the govt did nothing, is it not true that the economy would have fallen much faster, and unemployment risen much higher? In other words, do you accept that, at least in the short-run, monetary and fiscal policies work?
In other words, do you accept that, at least in the short-run, monetary and fiscal policies work?
No, you can’t create stimulus by diverting the spending of money from one sector of the economy to another.
of course they work, how else would you explain the ‘boom’ part of the boom-bust cycle
Sure the correction would have been much sharper. But keep in mind government is only focused on the short-term. All they have done was delay the inevitable and make the bubble much bigger. They are simply pushing the problems for the next administration to deal with. These stimulus spendings and bailouts were not for the people’s sake but for their sake. Believe me, there are few politicians (other than Ron Paul) that gives higher priority to the general public than themselves. Elected officials are the ones worried about their image, getting reelected, and maintaining power. The administration has worked hard to “save” companies like GM, not because they give a damn for the little guy, but because of the enormous political support, special interest money, and large voter base. That’s one of the problems with democracy, but that’s a whole separate topic.
The problem is that the gov’t has created much distortion in the economy - resulting in malinvestment. To have real solid economic growth we need gov’t to get out of the way so the economy can restructure itself to have a sound footing. All gov’t has done is transfer wealth from the productive part of the economy into the inefficient malinvestments in the economy. Short term it appears to have “saved us”. When gov’t interference (stimulus) is removed again (they stop transfering the wealth toward malivestments) then the economy will fall again.
Gov’t will continue its policies of money printing and wealth transfer until we have a US dollar crisis.
Yes, they work. But they are costly.
Loaded verbs like “falling” and “crashing” only disguise the nature of the process with a veneer of negativity. The mentality of taking a reactionary negative view of these panicky events must be replaced with an understanding that they are “doing something” and are very much a change for the better.
If you can manage to convince middle class homeowners that precipitous drops in the values of their homes and 401ks simultaneously are good things because in the long term it’ll work out better for everyone, then you can sell damn near anything. For some people, things would have been absolutely horrific and I don’t think that they would have seen their fates as anything other than negative. Just saying.
Selling that is easy. The Keynesian goof troop constantly reinforcing nonsensical beliefs is the difficulty.
If they had done nothing, we would have fallen farther and recovered already. We are still going to fall farther, and putting it off will make it worse.
“Instead of implementing stimulus packages, if the govt did nothing, is it not true that the economy would have fallen much faster, and unemployment risen much higher?”
A stimulus is printing paper money and giving it to a small group of people. This will give them money to buy things. So the stores will be bustling as the shelves are emptied. The paper money will pass from hand to hand. Everyone is happy for a while, as they give away goods and labor in return for this paper money and feel rich. That’s in the short term.
In the long term, prices will rise because of that new paper money. Whoever is stuck with it will see that it isn’t worth as much as he thought. We have reason to fear double digit or even hyperinflation, because of all this stimulus and other spending they are doing with no end in sight.
When your money can only buy half of what it used to [think of gasoline being $10 or more a gallon] it means your job is paying you half of what you used to get. Employers are making only half of the profits they used to They will have to lay people off.
Banks will be forced to lend at higher interest rates, lest they get back money made useless by inflation. But that means people wont be able to take out those loans, or to repay the old ones if the rates are reset. And if they aren’t reset, the banks lose because they are getting useless money, worth half of what it was when they lent it. Any way you look at it, the banks are in for trouble.
Bottom line, a stimulus is like taking meth. Fills you with energy for a while, at the cost of turning you into a skeleton.
Al lthis without even going into other HUGE problems the stimulus is gonna make. Mainly, once a bank gets one stimulus, it’s gonna think “Hey, why not make the exact same dumb moves again?. That way I’ll get more stimulus.” GM now won’t care about making good cars. They are owned by the govt. To make money for themselves, all they have to do is convince the govt to give them taxpayer money. Hey, why not?
Stimulus does nothing but prevent current malinvestments to be liquidated and cause new malinvestments to be made. If you say that a correction occuring is “worse” then, yes, but only for a while. As the continued stimulus causes more and more malinvestments, eventually the malinvestments will crowd out the productive economy and the division of labor will collapse, reducing society to barbarism. At that point, stimulus stops “working”.
How about selling it as a transition from a state in which many people mistakenly beleive that they have great future wealth to a state where they correctly know that they don’t.
“If you can manage to convince middle class homeowners that precipitous drops in the values of their homes and 401ks simultaneously are good things because in the long term it’ll work out better for everyone, then you can sell damn near anything.”
I’d try “Yes, we have lost, many of us big time. Nothing can be done about that except maybe punish the ones responsible by letting them go bankrupt too. Now we face two choices: We can either start over with what little we have left, or we can repeat our mistake all over again and lose everything.”
Agree with Bloomj31. Humans by nature are short term oriented. We tend to want immediately gratification. Almost no-one is gonna want to hear that a recovery is years off in the making and that we’ll have to let things get worse before they get better. Think about the real world. Few are willing to wait years or even weeks to take advantage of the latest technology when it comes to cell phones, computers, and electronics. Most people don’t keep their cars for more than 10 years - many trade them in every 3-4 years. For fans of an MLB or NFL team, how many will wait years for a franchise to rebuild after a lousy season?
“Humans by nature are short term oriented.”
The examples you gave are all from a 21st century wealthy advanced civilization. Not sure it proves something about human nature inherently.
Besides, human nature is to learn from the school of hard knocks. Take Germany. They learned from there little adventure with the Weimar republic not to inflate ever again. They still know this. People hit by the Great Depression learned not to trust banks, to this day, many of them. [Course, you can say I’m also giving examples of 20 th century etc.]
So even if they want it all right now, they can learn patience. Proof: There are patient people in this world.
In the “real world” equity is delayed gratification. Time preference is not so extreme that nobody looks past tomorrow. This is not a matter of time preference anyway. It’s an incorrect prediction of a future price. No current gratification is lost, except perhaps being upset at the error, which is fruitless.
Yes it would have fallen faster, but not as far. Employment would have risen faster but not as high. What curing the symptoms does is makes the future penalty worse. Its like climbing a tree with bees stinging you, sure if you numbed your body you wouldn’t feel the pain, but when you get to the top and you fall out of a tree you are way worse off.