No Social Security or Medicare tax for a year. Raise the retirement age by one year starting in 2014. Pure fiscal stimulus, no additional long-term debt.
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TalkingHead says:
Bernstein in 2012!
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November 20, 2009, 8:32 amWidmerpool says:
Or, as is done in Texas, prohibit Congress from meeting other than 140 days every two years. Pure fiscal stimulus, no additional long-term debt.
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November 20, 2009, 8:33 amBlue Neponset says:
You are forgetting that the Social Security surplus is invested in US gov’t securities. This debt is not included in the budget deficit. If that $$ doesn’t come in it will have to be replaced with debt that will add to the deficit. It is an accounting trick to be sure but the idea that the SS & Medicare money isn’t already being spend it just plain wrong.
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November 20, 2009, 8:43 amIchthyophagous says:
Obviously the real question is whether the reduced revenue would be sufficiently offset by the increased retirement age. A link on this would be appreciated.
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November 20, 2009, 8:56 amAnon says:
Won’t work. You can’t dole out dollars to the cronies who got you elected.
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November 20, 2009, 8:59 amGlenn Bowen says:
Burn in eternal Hell Fire.
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November 20, 2009, 9:01 amDavid Welker says:
How about this:
Or this:
The point is that the link you make between the FICA tax cuts and how to pay for it is artificial.
Of course, it is not that I don’t like your idea to some degree. We definitely do need more fiscal stimulus. As long as the economy is doing poorly, it will be very difficult to raise enough revenue to avoid deficits. Therefore, improving the economy should take a priority over avoiding short-term deficits.
Payroll tax cuts may be more effective than tax rebates in the form of checks mailed out to be people. It is an interesting question, whether that is correct.
It should be pointed out that there is some problems with your proposal in terms of equity. People who are still in school or involuntarily unemployed would not directly enjoy the tax cut, but would have their retirement delayed for a year.
I wonder how many people would voluntarily trade a year of retirement benefits for a year of no FICA?
The only real reason I would see to implement stimulus in this manner is if it were more politically feasible. But I do not think it would be anymore politically feasible than other forms of stimulus that I prefer. Raising the retirement age would probably make a lot of people approaching retirement angry and further their sense of insecurity. It could also hurt consumer confidence more generally, as it might be seen as extreme, and therefore desperate.
Interesting thought experiment, but I don’t think it flies.
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November 20, 2009, 9:04 amPete Freans says:
No Social Security or Medicare tax for a year. Raised the retirement age by one year starting in 2014.
Also, stop spending money that does not yet exist. Pure Fiscal Stimulus...
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November 20, 2009, 9:06 amDavid Welker says:
Blue Neponset,
Bernstein knows that this would increase the deficit in the short-term. He is arguing it won’t increase it in the long-term.
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November 20, 2009, 9:08 amDavid Welker says:
Seriously? The amount of economic ignorance in this country is astonishing. Cutting spending does not constitute fiscal stimulus.
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November 20, 2009, 9:10 amShelbyC says:
It doesn’t constitute current economic stiumlus...
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November 20, 2009, 9:26 amPete Freans says:
Seriously? The amount of economic ignorance in this country is astonishing. Cutting spending does not constitute fiscal stimulus.
So I assume you believe that government spending creates wealth? Allowing taxpayers to keep more their money is, by it’s very nature, economic stimulus. I believe Professor Berstein’s proposal allows the same benefits. But I guess we are both ignorant...
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November 20, 2009, 9:31 amBlue Neponset says:
Thanks for the clarification.
If long term is five years then the stimulus package won’t increase the deficit in the long-term either. By 2014 the economy should be back on track and the increased tax revenue will pay for the debt we used to finance the stimulus package.
IMO, investing in infrastructure via the stimulus bill is a better use of our money than giving someone a $45 weekly tax cut.
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November 20, 2009, 9:37 amtherut says:
Better yet let people opt out of SS forever.
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November 20, 2009, 9:40 amBlue Neponset says:
Lockheed Martin, GE, and General Dynamics got fairly wealthy via gov’t spending.
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November 20, 2009, 9:41 amDan says:
Check out http://EconomicPlanForAmerica.com — it’s been going around, and probably is pretty good.
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November 20, 2009, 9:51 amProf. S. says:
Here is the idea that I sent to some friends yesterday. I think it is better than the hairbrained ideas we see out there today.
Buy 100,000 treasure chests, put $1 million in each of them, bury them throughout the country and then allow people to buy clues as to their location. The cost of the program would be $100 billion (1/8th of the first stimulus) plus or minus some burying costs (although, that would create burying jobs). We would also then offset some of the total cost through selling the treasure map clues. People would spend money trying to locate the treasure (which will stimulate spending) and when they found it, they’d have $100,000 to spend and give us a huge multiplier of new jobs created.
I mean, if we’re just handing out cash, let’s at least make it fun.
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November 20, 2009, 9:52 amCornellian says:
It would be better to just raise the retirement age by a year without the tax holiday. That would help a lot in getting our long term finances under control.
Of course no politician has the guts to propose it, let alone vote for it, because old people are disproportionately more likely to vote.
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November 20, 2009, 9:54 amOren says:
More importantly, you can’t bind the 2014 Congress to implement the second half. So 2014 rolls around and they are free to dump the retirement age change, meanwhile the money is already spent.
Fundamentally, Congress lacks the power to lash itself to a particular long-term fiscal policy and hangs around way too many
Sirenslobbyists.Quote
November 20, 2009, 10:07 amAnderson says:
Buy 100,000 treasure chests, put $1 million in each of them, bury them throughout the country and then allow people to buy clues as to their location.
Keynes actually suggested this, slightly tongue-in-cheek:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
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November 20, 2009, 10:49 amPaul says:
The retirement age should be raised regardless — why not just start raising it by 2 months every year?
Also — for people who can’t work the SSI/disability payments are still available prior to the retirement age — raising the age only delays the ability to collect for those who could keep working — if they/I want to stop I need to save more (ie delayed gratification)
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November 20, 2009, 10:51 amFloridan says:
therut: “Better yet let people opt out of SS forever.”
Great idea! Then, years in the future, the government can respond to all the elderly who burn through their savings and demand the government bail them out.
Didn’t the Bush administration try to wean the public from SS with private accounts? Don’t hear much about that idea since the financial collapse and 30 — 50 percent reductions in 401(k) accounts.
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November 20, 2009, 11:00 amShelbyC says:
So did King Henry. The government spending doesn’t create wealth, it just moves it.
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November 20, 2009, 11:06 amSteve says:
Allowing taxpayers to keep more their money is, by it’s very nature, economic stimulus.
Cutting spending does not “allow taxpayers to keep more of their money.” In fact, spending cuts would mean that many taxpayers have less money in the first place. Hey, here’s a great idea for how to end the recession: let’s start putting lots of government contractors out of work!!!
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November 20, 2009, 11:07 amDotar Sojat says:
Now, now, David, that would mean letting the common people spend more of the government’s money.
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November 20, 2009, 11:10 amPete Freans says:
Lockheed Martin, GE, and General Dynamics got fairly wealthy via gov’t spending.
Government must either tax its citizens or borrow money in order to spend money. If government spends $1000.00, it must take $1000.00 out of the economy. Defense contractors are certainly benefiting from these highly specialized contracts (and they do provide a valuable service for our country’s general defense). However, those monies given to GE, for example, have been restributed from someone else.
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November 20, 2009, 11:16 amBlue Neponset says:
Government spending is a component in calculating the value of an economy. Gross Domestic Product = private consumption + gross investment + government spending + (exports − imports) Where in that equation do you see $10,000 leaving that economy?
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November 20, 2009, 11:28 amTamerlane says:
It’s my understanding that most of the deficit in Social Security and Medicare is because current beneficiaries of the LBJ’s “Great Society” are collecting benefits far in excess of what they’re actuarially entitled to in terms of what they paid into these funds over their lifetimes. Current workers are actually paying into the fund an amount that will just about cover their eventual projected benefits. The same is true ofr most workers who are nearing the age of SS eligibility. The problem is an enormous backlog of outstanding Social Security and Medicare expenditures that no one has actually paid for.
Very minor adjustments (each one of which is anathema either to liberals or conservatives) would solve the problem either individually or in combination, e.g., an increase in the age of eligibility, a means test for eligibility, a large but temporary surtax in the SS and Medicare payroll taxes, a small but permanent increase in these taxes, extending the payroll tax to all income. Alternatively, bite the bullet and admit that SS and Medicare are quasi-welfare programs and fund them from general revenue with appropriate across-the-board tax increases to pay off past debt and eventually switch to a paygo system.
Allaid, I like Prof. Bernstein’s idea. It would be stimulative and it could be designed to be revenue neutral.
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November 20, 2009, 11:28 amStating the obvious says:
The government spending doesn’t create wealth, it just moves it.
So the Hoover Dam, the interstate highway system, clean drinking water and sewer systems don’t create wealth (not to mention a court system that enforces laws and ensures that contract disputes are resolved other than breaking the other guys legs).
Good to know.
It is amazing how ungrateful libertarians are–especially considering that many prominent libertarian bloggers, including Mr. Bernstein, are government employees.
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November 20, 2009, 11:44 amDavid Welker says:
Pete Freans,
If the economy is leaving people unemployed because people are hoarding money (or banks are hoarding money), then it makes sense for the government to run a deficit (borrow hoarded money) in order to employ those people.
It is common sense that if people work rather than do nothing (when their unemployment is involuntary), there is some possibility of benefit for society from their work. Unemployment is very harmful for the unemployed and their families and it is even harmful for those who are employed, who have less choices in terms of changing jobs. In fact, studies show that college students who graduate into a recession not only have lower pay when they finally get their first job, but that 15 years later (when the economy is improved) their income is still negatively affected. Large amounts of unemployment in society is very serious and very wasteful. We are wasting a lot of resources everyday we allow unemployment to continue at unnecessary high levels.
You seem to be assuming that the government is taking the money out of the private sector, which is putting it to good use. That is, that government spending is “crowding out” private spending. That would be true in good times, but that isn’t true in situations where the private sector is not causing the economy to run at full employment.
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November 20, 2009, 11:51 ambillw, Silicon Valley, CA says:
Federal Income taxes paid by individuals amount to about $1 trillion a year. Cancel the Stimulus program, return TARP money to the Treasury and cut Federal spending a minimum of $0.5 trillion and have individuals pay no Federal income taxes for a year. See the result. Then change the tax law to either a flat tax or the Fair Tax (a sales tax only — no corporate tax). Raise interest rate to the 3% level. The employment problem will be resolved within that year. Curtail federal spending after the above cut to be one percentage point less than inflation. Start over on healthcare and propose the Republican plan. Do stairstep changes.
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November 20, 2009, 11:55 amNickM says:
Most of these bottles would be buried in the 99th Congressional District of North Dakota.
Nick
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November 20, 2009, 11:58 amsecond history says:
Better yet, abolish Medicare and Social Security altogether. Persons currently receiving benefits would continue to do so (as would persons within 10 years of retirement), but persons below the age of 30 would be told not to depend on SS and Medicare. Persons between the ages of 30 and 55 would receive decreasing benefits (the farther away from retirement the less received).
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November 20, 2009, 11:59 amDavid Welker says:
Yes, this IS a highly ridiculous statement.
If an individual pays a million dollars for a lavish birthday party, that creates wealth.
But if the government builds Hoover dam, that just moves wealth.
If an individual gets breast implants, that creates wealth.
But if the government creates the Internet, that just moves wealth.
If an individual buys an expensive luxury car, that creates wealth.
But if the government provides many people with a public university education, that just moves wealth.
Seriously, the idea that the government just moves wealth is so ridiculous that it boggles the mind.
But this is what passes as “insight” in some conservative circles.
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November 20, 2009, 12:01 pmArthurKirkland says:
Temporary reduction of certain taxes (Social Security, Medicare) merits consideration. Increasing the retirement age does, too. Ensure that inheritance is taxed no more favorably than income and we might have the foundation of great legislation to benefit the current economy, the long-term balance sheet and our society in general.
Who has a pencil and pad?
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November 20, 2009, 12:22 pmShelbyC says:
You must spend a lot of time with your mind boggled, David. Yes, when individuals do those things they create wealth, and when the government does them it does not. Here’s why: When an individulal pays for a lavish birthday party, he has to do something in exchange, like provide breast implants or help build an expensive car. All these services people perform get exchanges through what we call the “economy”. However, when the government builds the Hoover dam, they don’t do anything to earn the money they use, they just take someone else’s money, who would have spent it on, say, breast implants (I like your example).
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November 20, 2009, 12:36 pmNate says:
Bernstein’s proposal is just another in the line of nonsense plans intended to “starve the beast,” i.e. to ultimately constrain the growth in the size of government. It will not have any stimulus effect. Bernstein is too disingenuous to call it what it is and instead parrots the usual conservative nonsense that cutting taxes regardless of the condition of the economy will stimulate growth.
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November 20, 2009, 12:41 pmDavid Welker says:
Well, you have proven that your objections to government are vacuous.
Congratulations for losing the argument.
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November 20, 2009, 12:44 pmDavid Welker says:
Nate, I think you are being cynical. It may be that payroll taxes would not have the stimulus effects we would hope, but that doesn’t mean that Bernstein is insincere in his policy proposal.
It is also hard to see how this would “starve the beast” or accomplish any other such grand fantasies. I don’t think it is a good idea, but I don’t think it is insincere or crazy either.
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November 20, 2009, 12:47 pmShelbyC says:
Me? I’m pretty sure you lost the argument when you first started typing. It’s like you have some fundamental lack of understanding of what the economy’s about.
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November 20, 2009, 12:50 pmShelbyC says:
Hell then, why do we bother working? Let’s just sit back, let the government create all the wealth, and do nothing but consume? Talk about your ridiculous statements!
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November 20, 2009, 12:56 pmMahan Atma says:
And as millions of people opt out, who will pay for the benefits of current and near retirees?
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November 20, 2009, 12:57 pmStating the obvious says:
However, when the government builds the Hoover dam, they don’t do anything to earn the money they use, they just take someone else’s money, who would have spent it on, say, breast implants (I like your example).
You really are a dumbass. Regardless of the source of the money, the Hoover Dam has been producing electricity and providing water for Nevada and California since 1936. It cost $49 million to build, yet it produces 4 billion kWh of electricity a year and Lake Meade is a source of water and recreation for millions of people.
Please explain coherently how a $49 million investment of taxpayer money has not created vast wealth for countless other American citizens.
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November 20, 2009, 1:08 pmSteve says:
Let’s just sit back, let the government create all the wealth, and do nothing but consume? Talk about your ridiculous statements!
No one says that the government can function without human beings who work for the government and human beings who contract with the government.
Let’s say I work and earn $10 and go out and buy a screwdriver with it. Okay, now let’s say the government confiscates my $10 before I can spend it, and they go buy a screwdriver. Why is one screwdriver purchase a wealth-creating transaction and one isn’t?
Now, the government surely hasn’t ADDED any value in my example. But if the government contracts for something that wouldn’t happen otherwise — like the purchase of a Sherman tank, or the construction of the Hoover Dam — there seems little question to me that value has been created.
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November 20, 2009, 1:14 pmShelbyC says:
Yeah, well you’re ugly. The government didn’t “create” the $49 million, it simply transfered $49 million from the private sector, by force. Now maybe the $49 million would have created less wealth the Hoover dam, but if so, why did we need to tax people to pay for it? Why couldn’t it be build by volunatry investment? Private transactions create wealth because they are win-win, both parties agree to the transaction because the transaction makes them better off. When the govermnent builds, say, a dam, it simply takes money to build it, making one party better off and the other party worse off.
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November 20, 2009, 1:22 pmStating the obvious says:
When the govermnent builds, say, a dam, it simply takes money to build it, making one party better off and the other party worse off.
So which parties were worse off for the building of the Hoover Dam? There are certain functions (like building huge dams and the interstate highway system) that private parties are simply incapable of undertaking. For another prime example, look at the construction of sewer and public water systems in the second half of the nineteenth century.
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November 20, 2009, 1:28 pmSteve says:
When the govermnent builds, say, a dam, it simply takes money to build it, making one party better off and the other party worse off.
So let me get this straight. If I spend my money to build a dam, I’m better off, but if the government spends my money to build a dam, I’m worse off. Really?
Now maybe the $49 million would have created less wealth the Hoover dam, but if so, why did we need to tax people to pay for it? Why couldn’t it be build by volunatry investment?
If it was better for our country to defeat the Nazis than not to defeat them, why couldn’t World War II have been funded by voluntary investment? Gee, maybe there are some large-scale projects that only a government can accomplish effectively.
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November 20, 2009, 1:29 pmShelbyC says:
The screwdriver example is a great example to illustrate my point. The governement doesn’t create the wealth (the screwdriver) it simply moves it. Same thing with the Sherman tank. The government basically takes what the private sector would have done with the money (say breast implants or a cure for cancer) and turns it into a sherman tank. It doesn’t need to add value to make the transaction happen because it can simply force the transaction.
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November 20, 2009, 1:29 pmTamerlane says:
Can you conclusively demonstrate that that that $49 million might not have been better invested — and created even more wealth — if left in private hands? Perhaps it was even malinvested because the government did it: A lot of folks would argue that the water and powerr provided by the Hoover Dam have encouraged population growth in the southwest US that far exceeds the true carrying capacity of the land. The economic concept here is opportunity costs: There are many associated with allowing political forces rather than market forces to determine the allocation of resources, e.g. the “bridge to nowhere”.
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November 20, 2009, 1:31 pmDavid Welker says:
Stating the obvious,
You are certainly right about ShelbyC. He is an extremist. I don’t think he is representative of conservatives or anyone else. He isn’t worth arguing with. There are much better uses of your time.
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November 20, 2009, 1:35 pmShelbyC says:
Correct, I am not a conservative. And the reason you’re having so much trouble with the arguement is because you’re wrong.
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November 20, 2009, 1:39 pmStating the obvious says:
Can you conclusively demonstrate that that that $49 million might not have been better invested
If this is your attitude, I am surprised you are utilizing the government-created internet. And btw, look at the history of the computer itself, private industry wasn’t much interested in it. The government pretty much had to beg industry to adopt computer technology going so far as having the military sponsor the development of business programming languages (COBOL) so IBM would have customers other than the military.
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November 20, 2009, 1:44 pmRick A. says:
This is absurd. Wealth is created when the value of an asset exceeds liabilities. The value Hoover Dam has created exceeds its liabilities many times over.
In the Hoover Dam example, assume arguendo that 100,000,000 taxpayers paid $0.5 to create the Dam. Suppose further that, since it was built, 10,000,000 people have been enriched $10 because of the value of the benefits produced by Hoover Dam. Wealth, specifically $50,000,000, has been created — because the government spending was an investment.
The “one party,” all taxpayers, have been made very slightly worse off, while the “other party,” beneficiaries of Hoover Dam, have been made better off in excess of the harm done to the pool of taxpayers.
To privilege private transactions over public expenditures for reasons of philosophy or ethics is of course fine. To demonstrate that private transactions are more efficient and/or effective than public ones is often straightforward.
To pretend that the source of an investment negates any benefit therefrom is ridiculous.
[edited for typos — twice]
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November 20, 2009, 1:44 pmJoe says:
The age of retirement should rise a year given advancements of medicine and so forth anyway. Balancing it off somehow makes some sense. How is another question.
As to the suggestion, what are the numbers? How long would the money not coming in take to be offset? I’m betting there are a lot of variables here.
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November 20, 2009, 1:48 pmJoe says:
[edited for typos — twice]
Gold star for you! :)
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November 20, 2009, 1:49 pmDavid Welker says:
ShelbyC,
What argument? Your blatantly wrong assertion that the Hoover dam has no value is simply wrong on its face and cannot be classified as an argument. If someone asserts up is down, or my dog is actually a cat, I would assume they are either joking or crazy.
Like you.
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November 20, 2009, 1:50 pmDilan Esper says:
1. I fully agree with Professor Bernstein. This is a great idea.
2. Some of the anti-stimulus conservatives in this thread are not only ignoring the findings of mainstream economics about fiscal policy, but are ignoring something they know about the private sector and don’t want to apply to the public sector. And that is the role of debt in making us richer.
Many, many businesses start off deep in debt. Some sort of credit is extended to them, and they use that as seed money to build the business. When the business grows, the loan is paid off. Any time that happens, you have to ask yourself “if it weren’t for that debt, would the business have been able to create wealth?”.
Well, it works the same way with government. Deficit spending (lower taxes, higher spending) borrows from the future to pay for the here and now, on the premise that in the future we will be able to use the wealth we create to pay off the debt. Fiscal stimulus really isn’t any different than financing a start-up business– and in both cases, anyone who can’t see how the debt can finance prosperity isn’t looking hard enough.
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November 20, 2009, 1:53 pmShelbyC says:
I knew you didn’t bother reading the stuff you respond to; my point, that you adressed above, was that the government doesn’t create wealth, it moves it out of the private sector. I didn’t say that the hoover dam doesn’t have any value. And I can tell by the tone of your comments that you don’t get laid very often, maybe you can pay somebody to help you with that, cuz the government sure isn’t.
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November 20, 2009, 2:16 pmConstantin says:
An idea: we should have some guys write down what things the government can and can’t do, based partly on this insight, and then that can be the rule going forward for the country.
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November 20, 2009, 2:17 pmbpbatista says:
Temporary tax cuts, holidays, rebates, etc. do not work. See Milton Friedman’s permanent income hypothesis. See also, 2001 tax rebate, 2008 tax rebate, 2009 tax rebate, etc.
Only permanent tax cuts will have any significant lasting effect on the economy.
Also, very few businesses — if any — make hiring and investment/expansion plans based on social security or Medicare taxes.
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November 20, 2009, 2:19 pmRob in CT says:
Well, the retirement age is probably going to have to rise. People are living longer.
I’d love to see a package deal where we get a liberal solution to this, a conservative solution to that and the result is healthier US government finances. I’m not holding my breath.
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November 20, 2009, 2:24 pmPubliusFL says:
There IS a question of whether value has been created, because when the the government “contracts for something that wouldn’t happen otherwise” like buying a tank, at the same time something that would have happened otherwise doesn’t. As Bastiat would put it, you have to balance what is seen against what isn’t. Sometimes government spending results in net creation of wealth, and sometimes it doesn’t. Each proposed spending has to be analyzed on its own merits to determine whether some kind of market breakdown or incapacity prevents market forces from bringing about the result that the government spending would accomplish, and whether that result is worth more than private individuals and entities would otherwise accomplish. In other words:
What he said.
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November 20, 2009, 2:27 pmGlenn Bowen says:
Yes– you are raising the age to allow more people (men, in the majority) to die before they can collect out of a system they’ve paid into all their working lives.
Compassionate liberal, are ya?
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November 20, 2009, 2:32 pmDavid Welker says:
This is entirely sensible. It is basically the correct framework for analysis. And yes, we must ask not just what is seen, but what is not seen as well.
Further, it is important, when going about such individual analysis of merits to remain unbiased and discard preconceived notions either for or against government.
No, it is not fine. How much are you going to tip the scale and skew the analysis? At what point does the “analysis” become a charade, because what really matters is your preconceived notions? One must should do their best to set such biases aside and try to judge fairly.
That is correct. It is often possible to show that private transactions are more efficient and effective. (I should point out that saying something is more efficient is NOT a value free exercise.) Hence, there is a huge role for the private sector. However, it is also often the opposite, especially when it comes to such social goods as public education (whether or not funded through vouchers), public parks, public infrastructure, and the like.
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November 20, 2009, 2:39 pmSteve says:
An idea: we should have some guys write down what things the government can and can’t do, based partly on this insight, and then that can be the rule going forward for the country.
I have a better idea than a philosopher-king; I call it democracy. If people want to use their government to do something together, like build the Hoover Dam, they can do it.
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November 20, 2009, 2:47 pmConstantin says:
Constitution.
I was talking about the Constitution.
That was enacted fairly democratically, I recall.
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November 20, 2009, 2:50 pmDilan Esper says:
Temporary tax cuts, holidays, rebates, etc. do not work. See Milton Friedman’s permanent income hypothesis.
It’s worth noting that the permanent income hypothesis isn’t supported by any data and is also a very ideologically convenient thing for a right winger to believe.
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November 20, 2009, 2:52 pmDavid Welker says:
Oh, so now organizing factors of productions to create something new does have any value now?
So, when Toyota takes 100% of the resources it needs that belong to other people (through borrowing) and builds a factory for producing a for producing cars that are in high demand, are you going to assert that it has not created any value but have instead merely taken borrowed resources from other people? Last time I checked, using resources to build something useful was called adding value.
Your argument is ridiculous. And not only that, it is entirely unnecessary to oppose particular projects. One might concede (as any rational person must) that building the Hoover dam adds value, but then argue that there are even better uses of the funds elsewhere, either for other government projects or in the private sector.
Of course, this is an argument I think you would go in favor of building the Hoover dam. But, at least it is the right framework for analysis.
Anyway, let me rephrase your argument. You are not saying my dog is a cat. I have you all wrong. What you mean is my dog is a racoon.
I am glad we got that straightened out.
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November 20, 2009, 2:57 pmDavid Welker says:
Regarding the permanent income hypothesis, it should also be noted that people really do not know what their future income will be. A lot of people are aware that the do not know what their future income will be.
Actually, no one knows what their future income will be. I mean, lets take the concept of a “permanent” tax cut for a moment. Strictly speaking, there exists no such thing. One never knows when the political winds will shift.
Also, people do sometimes splurge when it comes to unexpected windfalls, even though they are onetime events.
I am not saying that the permanent income hypothesis has no validity, but I think it is only partially true.
But actually, to the extent it is true, it cuts against conservative policy preferences, because it implies that fiscal stimulus should be undertaken through increased government spending rather than tax cuts, since tax cuts can never be guaranteed to be permanent.
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November 20, 2009, 3:05 pmShelbyC says:
Toyota, of course, has only created value once it sells the cars and pays back the loan. If the government borrows money, makes something, sells it, and pays back its loan, all without forcing people to do anything, then sure, they have created wealth. But that’s not what the government does, they wouldn’t need the power of government to do that.
It’s really not that hard. If I choose to spend my lesiure time building something that benefits me or somebody else, I have created value, because I value that something more than my leisure time. If the government forces me to spend my time building something that they want me to build, no value has been created, they have simply replaced my value of my lesiure time with their value of what I created. It really is that simple.
And based on the way you’ve been arguing, your dog probably is a racoon.
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November 20, 2009, 3:19 pmPubliusFL says:
So if private transactions and public expenditures were equally efficient and effective in all cases, we should be completely neutral between a command economy and a laissez-faire economy? I don’t think so, because there are things we value besides economic efficiency. In a society that values individual freedom, it is reasonable to hold that he who earns the paycheck has first dibs on deciding how it is spent, and that there should therefore be at least some slight presumption against taking people’s money away from them. Of course, pretty much everyone agrees there are at least some public needs and public goods that justify taxation.
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November 20, 2009, 3:25 pmDerHahn says:
Steve — why couldn’t World War II have been funded by voluntary investment?
Hmmm, Why do you think it wasn’t?
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November 20, 2009, 4:24 pmJRL says:
ShelbyC won the thread at this point.
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November 20, 2009, 4:24 pmbyomtov says:
ShelbyC,
The screwdriver example is a great example to illustrate my point. The governement doesn’t create the wealth (the screwdriver) it simply moves it.
Not so in a recession/depression. The government does, in effect, create the screwdriver, because no one else wanted one. So the guy who makes screwdrivers is out of work unless the government comes into the picture.
When private demand drops the government is putting idle resources to use in its spending. The choice isn’t whether the factory produces goods for the private market or goods for the government. The choice is whether the factory is idle or produces goods for the government.
By the way, while reducing payroll tax temporarily may be a decent idea it is hardly “pure stimulus.” Some of the extra money workers will get would be spent, true, but some will be saved or, equivalently, used to reduce debts.
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November 20, 2009, 4:27 pmSteve says:
The assumption seems to be that if two parties enter into a transaction, it must be beneficial to both of them, and therefore wealth has been created. Whereas if the government enters into a transaction, it’s obviously not beneficial to everyone (because if it was, the private sector would have done it already), and therefore wealth is merely being shifted around inefficiently.
I mean, this seems crazy to me, but it seems to be the operative theory at any rate.
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November 20, 2009, 4:33 pmRick A. says:
David,
We have a miscommunication. I simply meant it is “fine” for an individual to privilege one transaction over another as a matter of one’s opinion. I did not mean for such privilege to carry over into analysis.
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November 20, 2009, 4:35 pmShelbyC says:
Well, how would the government enter into a transaction without compulsion at some point in the process? The whole point of having a government is that we need an organization in which to vest the ability to use force.
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November 20, 2009, 4:50 pmJoe says:
Yes– you are raising the age to allow more people (men, in the majority) to die before they can collect out of a system they’ve paid into all their working lives.
Compassionate liberal, are ya?
Here we are talking one year. Are they all dying in that one extra year or something? I also said it would be useful to balance it with something else, like something that would help those you cite. And, if they pay into a pool that helps their family members et. al., I guess if they themselves don’t benefit, it gets them nothing.
Finally, again, people are living longer than back when the system was first put in place. Are you saying that you support in effect an extension of the benefits in question or are you just being a snarky troll?
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November 20, 2009, 4:51 pmDotar Sojat says:
ShelbyC — all your income are belong to them.
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November 20, 2009, 4:53 pmbyomtov says:
If the government forces me to spend my time building something that they want me to build, no value has been created, they have simply replaced my value of my lesiure time with their value of what I created. It really is that simple.
But suppose you build furniture, say.
I say, “Shelby, I’ll give you $1000 if you’ll build me one of those nice tables.” You agree and make the table, and presumably value has been created.
Why then, if the government says the same thing, and you again agree to the deal, has value not been created, all the more so if you were sitting around in your shop doing nothing because nobody was spending money on tables?
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November 20, 2009, 5:28 pmShelbyC says:
If you were going to have someone build a chair for $1000, and instead the government takes your $1000 and gives it to me to build a table, no value was created, just shifted from a chair to a table, and we had deadweight loss caused by the govt taking your $1000. Now, you say, but we’re in a recession, so you wouldn’t have spent the money anyway. Fine, but we’re still exchanging a chair in the future for a table today, and presumeably since you weren’t spending your money you valued the ability to spend it in the future more than you valued the ability to spend it today.
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November 20, 2009, 5:57 pmDilan Esper says:
If you were going to have someone build a chair for $1000, and instead the government takes your $1000 and gives it to me to build a table, no value was created, just shifted from a chair to a table, and we had deadweight loss caused by the govt taking your $1000.
Where you are blowing it is that the government, or you, can BORROW the money. Only the government can do it on more favorable terms than you can. In either case, as long as you are more prosperous in the future, you have essentially moved some wealth from the future back into the present. And that is, indeed, a stimulus.
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November 20, 2009, 6:19 pmAllan Walstad says:
It’s possible for the government to create something that increases wealth. It’s also possible for it to squander resources. One can always point to something that, in retrospect, looks like a good expenditure by government–particularly when the government has crowded out whatever privately funded alternatives might have existed. The pragmatic question is whether government generally allocates resources more or less wisely than the free market. There are all sorts of reasons, historical and analytical, to doubt that.
But my main point is to question this whole idea of economic stimulus. Ultimately, economic output increases because of saving and investment. Robinson Crusoe is instructive. He can increase his output of food, clothing, shelter etc by investing time and effort in making tools–capital goods. To do so he must save up ahead of time–a supply of food and other necessities–so that he can divert labor to capital accumulation. And, it’s important that he choose wisely what projects to undertake. If he plunges into a big project that he can’t complete because he doesn’t have enough savings, or that is otherwise of little use, he’ll be worse off. He certainly can’t increase his productivity by increasing his consumption.
The same is true of society. When the feds print up a bunch of money and make loans plentiful, it does not increase the supply of real savings and it is likely to stimulate misguided capital projects as well as over-consumption from current stocks. Whatever temporary flurry of activity may be induced thereby must come at the expense of more trouble later. Roughly the same is true of fiscal stimulus, most obviously if financed by monetary expansion or domestic borrowing. If it’s financed by foreign borrowing, then the question is whether government spending on average constitutes an investment that will generate sufficient return to cover the principal and interest. Again, a rather large, well-understood literature suggests otherwise.
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November 20, 2009, 6:20 pmMalvolio says:
Ah, there’s an excellent question.
If I work and earn $10 and go out and buy a screwdriver with it, that screw-driver is worth at least $10 to me and probably more. Call it $11. To the person who sold it to me, it was worth less than $10 (or he wouldn’t have sold it to me in the first place); say, he valued it at $9.
So, by buying a screwdriver, I have created $2 of wealth.
Now, the act of confiscating my $10 actually was an opportunity cost of $11 (since I was going to buy a screwdriver that was worth that much to me and now I can’t). The seller’s position is unchanged.
So I’ve lost $11 — how much has the government gained? Well, one screwdriver. Is that screwdriver worth $11? Who knows, but probably not. The person who authorized the purchase wasn’t spending his own money. He had a budget of $10 that he had to spend on something. The screwdriver might have been literally worth nothing.
So, yes, in the typical case, and certainly in the aggregate, government spending destroys wealth. There may be individual cases (Hoover Dam) where the government made a wise purchase, but they are few and far between.
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November 20, 2009, 6:24 pmr.friedman says:
All of us who expected to be retired in 2014 have lost so much money that we’re hoping for 2020.
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November 20, 2009, 6:49 pmShelbyC says:
What Malvolio said.
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November 20, 2009, 7:01 pmShelbyC says:
I wasn’t arguing that it wasn’t a stimulus (in the sense that we increase current economic activity) I was arguing that we we’re creating wealth, simply moving it (in this case from the future to the present). FYIW, I think I agree with you previous comment that the govt can borrow money, spend it now, and have the expenditure generate greater tax revenue in the future. I would only question whether or not it can do so more efficiently than the private sector.
BTW, I also think I agree with you & Dave B. about the idea in the OP.
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November 20, 2009, 7:21 pmFantasiaWHT says:
Fixed it for ya.
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November 20, 2009, 7:41 pmDavid Welker says:
ShelbyC,
I see what you are saying now. You are saying that no value is created unless maximum value is created. So, if there is some alternate use of the money needed to construct the Hoover Dam anywhere in the universe, then no value is created because there is a better use of the money.
But this is not a useful way of looking at things. Imagine if all the workers who worked on Hoover Dam were unemployed and did nothing productive with their time and all the resources that were used in the dam were likewise left idle. That is the baseline that we are talking about. So, construction of the Hoover dam creates value relative to that baseline.
The way you are using value, if any value whatsoever is created, that means that the Hoover Dam absolutely should be done. Because under your definition, there is only one thing that creates value, and that is the thing that puts the resource to the best use amongst all possible uses. By this definition, it is unlikely that very much activity at all, public or private, creates value. We do live, after all, in a world with incomplete information.
In contrast, the way I and others are using value, acknowledging that the Hoover Dam creates value does not imply the project should proceed. You still have to compare the value of the Hoover Dam project with alternative uses of those resources.
Anyway, there is another problem with your definition, and that it assumes a conclusion that would actually take work to arrive at.
Is the Hoover Dam the best use of the resources that was devoted to it? This is actually a hard question. It would take work to answer that question. First, you would have to calculate the value that the Hoover Dam produces. Second, you would have to calculate the value of other uses of those resources for other government projects or in the private sector. You cannot just assume that your conclusion without doing a fair analysis.
It is a good thing to ask this question. What is not good is to assume the answer. What you should do instead is investigate the answer. Without letting biases ruin your analysis.
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November 20, 2009, 8:23 pmmicdeniro says:
Why not raise the retirement age one year every year?
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ChrisTS says:
For those of us who will have to work until we drop dead because of health costs, raising the retirement age is not a big deal. Maybe more of my old friends will be around on campus longer.
By the way, could we go back to Regan era tax rates on the wealthiest? He was perfect, right?
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November 21, 2009, 10:15 pmDavid Schwartz says:
The problem is that the government puts idle resources to use producing no value. The presumption must be that nobody wants a screwdriver — what is the value of a screwdriver nobody wants?
The harm the government does in this case is enormous. First, obviously lost is the possibility that the money used could have produced something people do want. Second, incorrect signals are sent to the market when the screwdriver makers buy the supplies they need to make these — resources are diverted throughout the supply chain from productive uses to making things nobody wants. Any economic recovery is delayed because the economy fails to shift.
This is why the stimulus will do more harm than good. It will prevent the economy from adjusting to the present reality by continuing to push it in differing directions.
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November 21, 2009, 11:56 pmSarcastro says:
[There are some things where the market is better and there are some times where the government is better.
In terms of value creation, the market is generally superior. There are exceptions however. In the case of a project where the initial investment is vast and the outcome is either too long term or too speculative, the market nay be too present-weighted or risk adverse respectively. Thus, projects that do create a net economic gain may be neglected by the private sector.
The government has no such worries, and may embark onsuch projects.
The much ballyooed Hoover damn is an ecample, as is WW-2, as is much pure scientific research, as is the space race.
The, of course, does not take into account other non-value economic benefits the government may provide, i.e. public goods like highways.]
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November 22, 2009, 2:04 amDavid Schwartz says:
Sarcastro: You just have to be careful that you don’t wind up defending the practice of investing in lottery tickets by pointing to the occasional winner.
The market will generally be more present-weighted only because there are projects available in the present that produce a more reliable return. In that case, it makes more sense to defer the very-long-term project until there aren’t such good present prospects.
And describing the market as too risk averse for the project is another way of saying the project is too risky. Sure, some such projects will be successes, but if the market thinks the risks outweigh the benefits, it’s likely to be right more often than it’s wrong. People evaluating spending their own money tend to be more rationally risk averse than irrationally risk averse. They have to put their money somewhere.
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November 22, 2009, 2:51 pm