“The Paradox of Thrift (or saving) is a reductio ad absurdum by John Maynard Keynes that avers that if everyone saves, aggregate demand will decline, and this will imperil the economy. We’d like to contribute the ‘Paradox of Spending’ to Econ 101. This maxim holds that if everyone spends, there are no savings; debt surges and the implosion of that debt collapses an economy.”
Sunday, February 1, 2009
Paradox of Spending
The King Report has a great analogy of Keynes' Paradox of Thrift:
Stimulus for the Employed
Considering the richest counties 5 of the countries 10 wealthiest counties are around Washington, D.C., stimulus for this area should not be needed. And after the stimulus passes the wealth in these counties is sure to improve, regardless of "efficiency" and intent of the stimulus.
For a refresher on the horrible rate of unemployment for government and health and education workers in the Wall Street Journal by Allen Reynolds
Next, look at the supposed multiplier effect of government spending. The consensus seems to be around 1.57 - which, taken simplistically, results in $1.57 spent for every $1 of stimulus. Based on this we should borrow say $2T or $3T until this supposed multiplier gets just above 1. I say this in jest because the multiplier is not 1.57 and we will not grow our economy because of the stimulus. The government can always create jobs, but what it can't create is real wealth or improved living standard in the aggregate. North Korea is an example of government created wealth.
Finally, what are we going to do for an encore in two years when the money has been spent. Stimulate ourselves another $900,000,000,000? This is simply a massive shift of wealth from the prudent to the less prudent and a substantial growth in the power and reach of government. We should be reducing the cost of government not increasing it. We cannot stimulate our way out of credit contraction - the system needs to cleanse itself.
| 1 | Loudoun County, Virginia | $107,207 |
| 2 | Fairfax County, Virginia | $105,241 |
| 3 | Howard County, Maryland | $101,672 |
| 4 | Somerset County, New Jersey | $97,658 |
| 5 | Morris County, New Jersey | $94,684 |
| 6 | Douglas County, Colorado | $92,824 |
| 7 | Montgomery County, Maryland | $91,835 |
| 8 | Nassau County, New York | $89,782 |
| 9 | Prince William County, Virginia | $87,243 |
| 10 | Santa Clara County, California | $84,360 |
For a refresher on the horrible rate of unemployment for government and health and education workers in the Wall Street Journal by Allen Reynolds
Most of the spending is unlikely to be timely or temporary. Strangely, most of it is targeted toward sectors of the economy where unemployment is the lowest.
The December unemployment rate was only 2.3% for government workers and 3.8% in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3% and 15.2% respectively. Yet 39% of the $550 billion in the bill would go to state and local governments. Another 17.3% would go to health and education...
Next, look at the supposed multiplier effect of government spending. The consensus seems to be around 1.57 - which, taken simplistically, results in $1.57 spent for every $1 of stimulus. Based on this we should borrow say $2T or $3T until this supposed multiplier gets just above 1. I say this in jest because the multiplier is not 1.57 and we will not grow our economy because of the stimulus. The government can always create jobs, but what it can't create is real wealth or improved living standard in the aggregate. North Korea is an example of government created wealth.
Finally, what are we going to do for an encore in two years when the money has been spent. Stimulate ourselves another $900,000,000,000? This is simply a massive shift of wealth from the prudent to the less prudent and a substantial growth in the power and reach of government. We should be reducing the cost of government not increasing it. We cannot stimulate our way out of credit contraction - the system needs to cleanse itself.
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