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.

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.]

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.

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.

By the way, could we go back to Regan era tax rates on the wealthiest? He was perfect, right?

Paul: 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)

Why not raise the retirement age one year every year?

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.

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.

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.

No Social Security or Medicare tax for a year. Raise the retirement age by one year EVERY YEAR FOR TEN YEARS starting in 2014. Pure fiscal stimulus, no additional long-term debt.

Fixed it for ya.

Dilan Esper: 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.

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.

Steve: 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?

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.

Okay, now let’s say the government confiscates my $10 before I can spend it, and they go buy a screwdriver.

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.

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.

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.

byomtov: 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?

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.

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?

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?

Steve: 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.

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.

David Welker:
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?

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.

I mean, this seems crazy to me, but it seems to be the operative theory at any rate.

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.

ShelbyC: 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!

ShelbyC won the thread at this point.

Hmmm, Why do you think it wasn’t?

David Welker: 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.

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.

David Welker: 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.

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.

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.

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.

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.

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.

I was talking about the Constitution.

That was enacted fairly democratically, I recall.

Steve: 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.

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.

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. (Bold Added)

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.

To privilege private transactions over public expenditures for reasons of philosophy or ethics is of course fine.

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.

To demonstrate that private transactions are more efficient and/or effective than public ones is often straightforward.

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.

The age of retirement should rise a year given advancements of medicine and so forth anyway. Balancing it off somehow makes some sense.

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?

Steve: 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.

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:

Rick A.: 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.

What he said.

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.