Keynesian Economics does it work?

[ballin4life]

please do so since at this point in my economics education I am Keyne's *****

Also doesn't the US act as the consumer in the case of government expenditures? Is that not the entire concept behind fiscal policy?

Yes, the US is the consumer in this case. But this is the problem. The government is not subject to the market processes that make GDP a valid measure of economic good in the first place.

When I spend $500 on a TV or something, that indicates I've gotten at least $500 worth of value from the purchase, but when the government spends $100,000 on a tank, it doesn't necessarily get $100,000 of benefit for the people. The government is diverting resources from the private sector, where people can choose what they want to purchase, and using those resources to make other things that people don't actually want.

What is the purpose of the economy? To satisfy the demands of consumers. The government's consumption is not the purpose.


The claim of Keynes is that government spending helps because the government will employ workers, who will then spend their money on other things, raising demand for those other things and increasing production. This is flawed for a few reasons. For one, each dollar that the government spends comes out of the private sector in the first place, where it would also have been spent. For another, the people that the government employs would be better off (and more efficient for the economy as a whole) if they worked in the private sector. Once someone has a government job, he often won't search around for new jobs where his skills would be utilized more efficiently (since remember the government is producing things that people don't necessarily want). Finally, it's simply misguided to focus on the demand side of the economy rather than the supply side. The purpose of the economy is to create supply that satisfies the demands of consumers. There is no merit to "stimulating demand" because the purpose of the economy is to satisfy the demands that exist, not to change what people demand.

 

[Aesir]

Government spending does help with economic recovery, I would probably also say Investor confidence, and consumer perception play an important part too.

Then again this is just Salt water v fresh water economics.

So why do you think it helps the economy? I can refute the standard Keynesian nonsense if you want.

I highly doubt that, but good luck.

 

[ballin4life]

Government spending does help with economic recovery, I would probably also say Investor confidence, and consumer perception play an important part too.

Then again this is just Salt water v fresh water economics.


I highly doubt that, but good luck.

So your argument is basically "No you're wrong".

How about an explanation? How is diverting resources from things people want to things people don't want a good thing?

How does government spending increase "confidence" and why is "confidence" important anyway?

Don't know much about economic theory, but some very profitable and useful technologies have come from government/military projects and research.

Care to name some? It's definitely not enough to make up for the inefficiency.

 

[Aesir]

So your argument is basically "No you're wrong".

I don't think I even said that, but yes I do believe you're wrong. But I'm more skeptical you can succeed where Mitlon Friedman couldn't.

How about an explanation? How is diverting resources from things people want to things people don't want a good thing?

You need to explain specifically what you mean here.

If you like we could have a 1v1 debate here, probably in another thread though, I hate when good debate topics are wasted in here.

How does government spending increase "confidence" and why is "confidence" important anyway?

If we're talking just blind spending into useless projects then all it really does is give a sense of a false recovery. But if the spending targets the issues that are preventing the economy from recovering then it can be very successful. Increasing spending helps with confidence because if investors thing the economy isn't volatile they'll start trading again which lead to a faster recovery.

 

[ballin4life]

I don't think I even said that, but yes I do believe you're wrong. But I'm more skeptical you can succeed where Mitlon Friedman couldn't.

Heh. How did Friedman fail in this? Pretty much only Keynesians believe in stimulating the economy through government spending.

Also I think monetary policy isn't good for the economy either, but that's a bit more complicated.

You need to explain specifically what you mean here.

The government, in order to spend money, must take it out of the private sector. The government is not very efficient at allocating resources. The private sector is more efficient. So increasing government spending is moving resources from efficient areas to inefficient areas.

If you like we could have a 1v1 debate here, probably in another thread though, I hate when good debate topics are wasted in here.

If there is interest I wouldn't mind a mod moving these posts into a new thread.

If we're talking just blind spending into useless projects then all it really does is give a sense of a false recovery. But if the spending targets the issues that are preventing the economy from recovering then it can be very successful. Increasing spending helps with confidence because if investors thing the economy isn't volatile they'll start trading again which lead to a faster recovery.

Ok, if the government can target spending into exactly the right areas of the economy, then yes the government can help the economy. But the thing is, they can't. That's why socialism fails. The government is inefficient. The economic calculation problem can only be solved through the market allocation process and price system. The government does not know exactly how much of each thing to produce (which is why the Soviet Union had problems with shortages).

But Keynesians would argue that ANY government spending will help the economy. Keynes himself said that paying people to dig ditches and fill them back in all day would stimulate the economy. As long as you agree that this is false, we are mostly in agreement.

Also entrepreneurs/businesses (if you mean that type of investing) do help the economy recover (the people trading stocks and stuff don't really). I don't think that government spending will increase the confidence of businesses, especially since government spending means either higher taxes (so entrepreneurs/businesses have less incentive to try to make money) or more government borrowing, leading to higher interest rates (so it's hard for entrepreneurs/businesses to finance projects). Either way it's a net negative for business in general (though the spending may help certain businesses).


One last thing: Recessions themselves aren't a problem - they are a solution to a problem. The problem is the resources squandered during an unsustainable boom. A recession is the markets correcting to move resources from things that people don't want as much any more (like housing right now) to things that people do actually want. So drops in "aggregate demand" are really just market adjustments to new demands of consumers.

 

[Aesir]

Ballin I'm not ignoring you, but I won't be able to respond tonight. (Migraine) And tomorrow I have some important things to do, so I will get back to you asap.

 

[DanteFox]

So your argument is basically "No you're wrong".

How about an explanation? How is diverting resources from things people want to things people don't want a good thing?

How does government spending increase "confidence" and why is "confidence" important anyway?



Care to name some? It's definitely not enough to make up for the inefficiency.

The point doesn't really have anything to do with Keynesian economics, as most of the technologies I'm about to name came from military developments.



The Internet
Communication satellites
Sonar
GPS

 

[ballin4life]

None of those were in response to economic stimulus. They were just random by-products of the military.

Anyway the original point was about WWII and it's not like those particular technologies got the US out of WWII by any means.

If you want to argue about where technologies come from, I can point out that many, many more technologies came from the private sector, and indeed of the things you listed I know that the Internet and GPS have been improved by the private sector. Plus it would be pretty hard to invent GPS/Satellites in the private sector because there are regulations against having your own satellites, right?

Also you forgot Tang

 

[DanteFox]

yeah like I said it has nothing to do with Keynesian economics, just listing what I figured he was referring to.

 

[Aesir]

I'm not doing point by point rebuttals I don't really care enough to.


All you have to do is look back at the great depression and see how effective it was, whenever Roosevelt stimulated the economy it improved, then it dropped because Roosevelt would listen to the deficit hawks and you see it double dip again. The problem is, people are out of work when the economy goes into a recession through lay offs or what have you. By spending money those people will have jobs, so they're working thus spending money. Because as long as a recession continues less people are going to spend money, they're going to horde it, which halts the recovery. Which is why sitting back and doing nothing is generally not a good thing to do.

 

[ballin4life]

lol the Great Depression went on for 14 more years after Roosevelt got elected, and it's not like the New Deal stopped completely. Not to mention the fact that Hoover tried to stimulate the economy too.

What metrics are you using to say the economy improved under Roosevelt's initial stimulus? Especially when my entire argument is that GDP is NOT a good measure of economic growth for Keynesians, and that stimulating the economy results in lower long run GDP anyway.

Jobs are not the goal of an economy. Everyone in the Soviet Union had a job, but their economy was terrible. We could pay people to dig ditches and fill them in again, but this would not be good for the economy. Jobs are good when they produce something useful.

Also any thoughts on the Depression of 1920? Where the government "sat back and did nothing"? Not to mention every other recession before the Great Depression?
http://en.wikipedia.org/wiki/Depression_of_1920–21

 

[Bob Jane T-Mart]

Just two things:

For one, each dollar that the government spends comes out of the private sector in the first place, where it would also have been spent.

Not necessarily. People do save money, especially when times are harsh.

For another, the people that the government employs would be better off (and more efficient for the economy as a whole) if they worked in the private sector.

This assumes that people can actually find jobs in the private sector.

 

[ballin4life]

Just two things:



Not necessarily. People do save money, especially when times are harsh.

Money is spent eventually (spending being the main focus of money and all). If future spending would better satisfy consumers, then they will choose to save.

Also remember that money saved goes into the financial system where it will be loaned out. Savings are actually the source of economic growth, since savings provide the capital that allows investors and entrepreneurs to create new items for consumers to enjoy.

This assumes that people can actually find jobs in the private sector.

They will find jobs eventually. Having the government employ them inefficiently is a waste of resources which will also prevent them from getting an efficient private sector job. This is a big problem: once I have a government job I won't be looking for that private sector job any more.

It's also kinda important to note that people can pretty much always find jobs in the private sector by taking a big pay cut (barring running into the minimum wage I guess). I could go offer to clean people's yards for $5 per yard or something. Obviously though people generally don't want to take a big pay cut, so they try to find a job that's close to their old salary. This is totally fine, but it's important to note that a fall in wages is part of the rebalancing of the economy during a recession, just like the fall in other prices. Market prices adjust to clear the markets.

 

[Nicholas1024]

What do you know, I'm agreeing with Ballin for once.

Let me give a hypothetical. Suppose many people are out of work, because some company went bankrupt. Well, there are several possibilities.

1) The out-of-work employees find their skills in demand, and quickly find new jobs. Best case scenario.
2) The out-of-work employees find their skills aren't in such demand at the moment, and eventually find lesser paying jobs in other fields. Not as good for them, but still a natural part of the economy, and eventually they'll recoup their losses.
3) The out-of-work employees find their skills aren't in demand, so the government gives them a job similar to what they had before. Well, this is the problem. The government is basically giving them money beyond what they'd earn in the private sector, making it fundamentally inefficient. Well, where does this money come from? Ignoring the issue of inflation for the moment (which takes away value from your money, hurting you in the end), taxes. That is, from YOU. Also, what are the odds those employees return to the private sector? Low. In all probability, they'll get raises over time, to AT LEAST match those obtainable in the private sector, so they'll get inflated incomes, benefits, and such at YOUR expense. And the increased taxes needed to sustain this will likely put more companies out of business, more people out of work, and lead to more government welfare jobs. Which will likely lead to even more taxes. It's a deadly cycle.

 

[ballin4life]

What do you know, I'm agreeing with Ballin for once.

Well, considering that EVERY other debate is about God ... lol

 

[Bob Jane T-Mart]

Money is spent eventually (spending being the main focus of money and all). If future spending would better satisfy consumers, then they will choose to save.

Although this is true, with inflation, the future spending will actually be less and hence money will actually be lost, unless their rate of return is high enough.

Also remember that money saved goes into the financial system where it will be loaned out. Savings are actually the source of economic growth, since savings provide the capital that allows investors and entrepreneurs to create new items for consumers to enjoy.

However, without spending the entrepreneurs wont actually be able to sell their goods and investors will not invest.

They will find jobs eventually. Having the government employ them inefficiently is a waste of resources which will also prevent them from getting an efficient private sector job. This is a big problem: once I have a government job I won't be looking for that private sector job any more.

It's also kinda important to note that people can pretty much always find jobs in the private sector by taking a big pay cut (barring running into the minimum wage I guess). I could go offer to clean people's yards for $5 per yard or something. Obviously though people generally don't want to take a big pay cut, so they try to find a job that's close to their old salary. This is totally fine, but it's important to note that a fall in wages is part of the rebalancing of the economy during a recession, just like the fall in other prices. Market prices adjust to clear the markets.

Firstly, that implies that there are jobs available in the job market. In the great depression, unemployment was above 15% (in the US), it's not going to be easy finding jobs like that, even if you do take a massive pay-cut. And again, what is the issue with taking up a government job where otherwise, you would have no job? You are still producing something quite probably useful, constructing schools, dams, bringing power to farms is actually quite useful (as what Roosevelt did in the New Deal). This sort of infrastructure actually paves the way for future growth. And when these stimulus measures end, these people will have to look for jobs in the private sector once again.

1) The out-of-work employees find their skills in demand, and quickly find new jobs. Best case scenario.
2) The out-of-work employees find their skills aren't in such demand at the moment, and eventually find lesser paying jobs in other fields. Not as good for them, but still a natural part of the economy, and eventually they'll recoup their losses.
3) The out-of-work employees find their skills aren't in demand, so the government gives them a job similar to what they had before. Well, this is the problem. The government is basically giving them money beyond what they'd earn in the private sector, making it fundamentally inefficient. Well, where does this money come from? Ignoring the issue of inflation for the moment (which takes away value from your money, hurting you in the end), taxes. That is, from YOU. Also, what are the odds those employees return to the private sector? Low. In all probability, they'll get raises over time, to AT LEAST match those obtainable in the private sector, so they'll get inflated incomes, benefits, and such at YOUR expense. And the increased taxes needed to sustain this will likely put more companies out of business, more people out of work, and lead to more government welfare jobs. Which will likely lead to even more taxes. It's a deadly cycle.

You're forgetting a 4th possibility:

These out-of-work employees sit there not doing anything at all, either living off the dole or stealing for a living. At least when you're a government employee, you're actually producing something which is of value to the community in many circumstances. But, when you're living off the dole, you're just being paid.

And when you're talking about how taxes stunt growth in the economy, I'd like to point out that the infrastructure built because of stimulus measures is of value to the community and that the for the community to get such infrastructure, it'd have to pay for it itself (or it would go without, which can be detrimental to the economy, eg. Rubbish public transport). Either way the community is paying for it.

 

[ballin4life]

Although this is true, with inflation, the future spending will actually be less and hence money will actually be lost, unless their rate of return is high enough.

Uh, presumably real interest rates are going to be positive, which means they will actually spend more ...

However, without spending the entrepreneurs wont actually be able to sell their goods and investors will not invest.

Yes of course. If the product that you as an entrepreneur are going to create WON'T be bought by anybody, then it SHOULDN'T be made.

Think about what recessions are. People suddenly do not want the goods that are currently being made. The solution is to let entrepreneurs and businesses find goods that people DO want.

Firstly, that implies that there are jobs available in the job market. In the great depression, unemployment was above 15% (in the US), it's not going to be easy finding jobs like that, even if you do take a massive pay-cut. And again, what is the issue with taking up a government job where otherwise, you would have no job? You are still producing something quite probably useful, constructing schools, dams, bringing power to farms is actually quite useful (as what Roosevelt did in the New Deal). This sort of infrastructure actually paves the way for future growth. And when these stimulus measures end, these people will have to look for jobs in the private sector once again.

Unemployment was high due to government policies and attempts to stimulate the economy. When you are overtaxing and overspending, there are fewer resources for the private sector to create jobs.

Even if there are no jobs, the solution is NOT to employ government workers, since this will only hinder the private sector's ability to create jobs even further, while also taking people out of the labor force and putting them to inefficient labor working for the government.

Sure, the government might get lucky and make something useful, but recall why the government is generally inefficient. Without profit signals, the government doesn't know what the demand actually is for the goods it produces (positive profits indicates that there is demand, negative profits indicates that there isn't demand). Furthermore, government workers, particularly the leaders, don't have any incentive to work hard or make good products, because they don't get to reap the profits if they do make something useful.

Also infrastructure has little to do with growth ... improvements in technology and the accumulation of capital are the sources of growth (particularly technology).

And once again, since the government is inefficient, it usually does NOT release its workers back into the economy to get private sector jobs (particularly since this would create unemployment, for obvious reasons).

You're forgetting a 4th possibility:

These out-of-work employees sit there not doing anything at all, either living off the dole or stealing for a living. At least when you're a government employee, you're actually producing something which is of value to the community in many circumstances. But, when you're living off the dole, you're just being paid.

This won't happen in a free market. Those out of work employees will find jobs eventually, because they have to. The price of their labor will fall until they are hired. The markets will readjust.

Your question is basically akin to asking "But what if McDonald's holds its prices too high and no one ever gets to have a burger?" This won't happen, because if there is no demand for burgers at a given price, McDonalds will lower prices. In the same way, if there is no demand for your services, you will lower your price as a worker.

And when you're talking about how taxes stunt growth in the economy, I'd like to point out that the infrastructure built because of stimulus measures is of value to the community and that the for the community to get such infrastructure, it'd have to pay for it itself (or it would go without, which can be detrimental to the economy, eg. Rubbish public transport). Either way the community is paying for it.

Yes, but the community would pay much LESS for it if it were provided by the private sector, since private sector businesses have INCENTIVES to cut costs and provide better service.



Monopolies are inefficient, right? The monopolist has no competition, so there is little incentive to produce a better product or to lower prices. Now consider that the government is the BIGGEST monopoly of them all. There is no competition, no profit signals, and no profit incentives.

 

[Nicholas1024]

As a side point, I disagree that monopolies are necessarily inefficient. If small businesses can enter the market at any time, the only way a monopoly will stay a monopoly is if that company is the MOST efficient possible, else it will go back to the normal free market situation. However, monopolies usually ARE inefficient if other businesses cannot compete for whatever reason (usually because the government said so). Your main argument is still valid, just thought I'd point that out.

 

[ballin4life]

As a side point, I disagree that monopolies are necessarily inefficient. If small businesses can enter the market at any time, the only way a monopoly will stay a monopoly is if that company is the MOST efficient possible, else it will go back to the normal free market situation. However, monopolies usually ARE inefficient if other businesses cannot compete for whatever reason (usually because the government said so). Your main argument is still valid, just thought I'd point that out.

That's true to an extent. The more barriers to entry that there are, the more inefficient a monopoly will be.

And the government has the most barriers to competition, since it makes laws that prevent you from competing.

 

[rvkevin]

And the government has the most barriers to competition, since it makes laws that prevent you from competing.

I'm having trouble coming up with an example where government banned competitors (of the public sector) from producing something. Is medicinal marijuana only legal to be produced by the government?

 

[ballin4life]

I'm having trouble coming up with an example where government banned competitors (of the public sector) from producing something. Is medicinal marijuana only legal to be produced by the government?

Check out this case:
http://en.wikipedia.org/wiki/Liberty_dollar

Also the post office.


I kinda misspoke there though. What I should have said was that the government has the most barriers to entry because they FORCE you to pay for their products. For example, if you want to go to private school, you are still paying for the public schools as well. So private schools have a really big barrier to entry there, which is why almost all private schools cater to the rich (since only the rich can afford to essentially pay for school twice).

 

[Bob Jane T-Mart]

Uh, presumably real interest rates are going to be positive, which means they will actually spend more ...

Will they be higher than inflation? I'm pretty sure that if you open up a savings account the interest rate will be very low. Oh and interest rates in the US are 0.25%, while inflation is 2.7%.

Yes of course. If the product that you as an entrepreneur are going to create WON'T be bought by anybody, then it SHOULDN'T be made.

Think about what recessions are. People suddenly do not want the goods that are currently being made. The solution is to let entrepreneurs and businesses find goods that people DO want.

But if entrepreneur's are closing up shop everywhere, you have high unemployment and society gets a whole lot poorer. It creates nasty downward spiral. Businesses close, unemployment rises, reducing incomes, causing further businesses to close, reducing incomes further, causing more businesses to close.

Unemployment was high due to government policies and attempts to stimulate the economy. When you are overtaxing and overspending, there are fewer resources for the private sector to create jobs.

Oh really? I'm pretty sure that Roosevelt's New Deal actually improved the state of affairs, employment increased and so did manufacturing.

Even if there are no jobs, the solution is NOT to employ government workers, since this will only hinder the private sector's ability to create jobs even further, while also taking people out of the labor force and putting them to inefficient labor working for the government.

I think you need to explain that further, I can't seem to make that connection.

Sure, the government might get lucky and make something useful, but recall why the government is generally inefficient. Without profit signals, the government doesn't know what the demand actually is for the goods it produces (positive profits indicates that there is demand, negative profits indicates that there isn't demand). Furthermore, government workers, particularly the leaders, don't have any incentive to work hard or make good products, because they don't get to reap the profits if they do make something useful.

I disagree. The government in a democracy is answerable to the electorate. The workers are answerable to the heads of department. They know what demand is there for their goods, because of opinion polls. And profit doesn't guarantee efficiency. The very fact that there is profit means that businesses are charging more than their products are worth. And increased prices have a negative effect upon the economy. However, the government doesn't need to make a profit, meaning it's products can be sold for exactly how much their worth, less than the private sector, freeing up disposable income for saving and spending.

Also infrastructure has little to do with growth ... improvements in technology and the accumulation of capital are the sources of growth (particularly technology).

Want to bet? Let's imagine we destroyed all the roads in the USA. What would be the effect upon the economy then? Everyone would have to walk/ride to work. This would result in lost productivity.

Oh and I'm pretty sure that Obama's stimulus measures targeted R&D pretty heavily as well.

And once again, since the government is inefficient, it usually does NOT release its workers back into the economy to get private sector jobs (particularly since this would create unemployment, for obvious reasons).

Okay, when the Hoover Dam was finished being constructed, what happened to the workers working on the project? I'm pretty sure all those labourers had to find work elsewhere.

This won't happen in a free market. Those out of work employees will find jobs eventually, because they have to. The price of their labor will fall until they are hired. The markets will readjust.

No. If there are more people than jobs, then there will be unemployment. And even if the markets readjust, it's a readjustment that makes everyone poorer.

Your question is basically akin to asking "But what if McDonald's holds its prices too high and no one ever gets to have a burger?" This won't happen, because if there is no demand for burgers at a given price, McDonalds will lower prices. In the same way, if there is no demand for your services, you will lower your price as a worker.

Addressed above.

Yes, but the community would pay much LESS for it if it were provided by the private sector, since private sector businesses have INCENTIVES to cut costs and provide better service.

But the private sector has incentives to charge higher prices, because of the profit motive. The government does not need to make a profit and if its services are poorer it loses government.

Monopolies are inefficient, right? The monopolist has no competition, so there is little incentive to produce a better product or to lower prices. Now consider that the government is the BIGGEST monopoly of them all. There is no competition, no profit signals, and no profit incentives.

Uh... Although monopolies are inefficient, the reason for their inefficiency is because of the profit motive. They charge high prices simply because they can. Whereas a government monopoly has no reason to make profit. They don't need/want to charge more for their goods than the cost of creating them.

I kinda misspoke there though. What I should have said was that the government has the most barriers to entry because they FORCE you to pay for their products. For example, if you want to go to private school, you are still paying for the public schools as well. So private schools have a really big barrier to entry there, which is why almost all private schools cater to the rich (since only the rich can afford to essentially pay for school twice).

Well... Some things are necessary in society. Schools, policemen, a justice system, a military etc. Without these things, society grinds to a halt, so it makes sense to force everyone to pay for them.

And private schools are also more expensive than public schools because they have to make a profit.

 

[ballin4life]

Will they be higher than inflation? I'm pretty sure that if you open up a savings account the interest rate will be very low. Oh and interest rates in the US are 0.25%, while inflation is 2.7%.

Yes, the US is in an extraordinary situation right now ... due to the government's stimulus (specifically the Fed holding interest rates low).

But if entrepreneur's are closing up shop everywhere, you have high unemployment and society gets a whole lot poorer. It creates nasty downward spiral. Businesses close, unemployment rises, reducing incomes, causing further businesses to close, reducing incomes further, causing more businesses to close.

Until prices fall enough to reach equilibrium again ... and entrepreneurs and businesses take advantage of cheap labor to make things people ACTUALLY WANT.

Let's consider what happens when you try to stimulate the economy:

Businesses close, leading to high unemployment. The government takes all these people and sets them to work digging ditches and filling them in again. Now, to pay all these workers, the government has to either borrow money (increasing national debt, and taking available credit away from businesses), raise taxes (putting more of a burden on the few employed people in the private sector, and leading to more unemployment) or cause massive inflation (leaving anyone who has any money saved up nearly penniless). All three of these alternatives will only hurt the private sector EVEN MORE. More businesses close, leading to more unemployment, and the cycle starts anew. Except it's even worse since we have a bunch of laborers getting paid to do inefficient work.

Oh really? I'm pretty sure that Roosevelt's New Deal actually improved the state of affairs, employment increased and so did manufacturing.

And the Great Depression went on for another 6+ years.

I think you need to explain that further, I can't seem to make that connection.

What connection ... can you be more specific? Or just look at my response above.

I disagree. The government in a democracy is answerable to the electorate. The workers are answerable to the heads of department. They know what demand is there for their goods, because of opinion polls. And profit doesn't guarantee efficiency. The very fact that there is profit means that businesses are charging more than their products are worth. And increased prices have a negative effect upon the economy. However, the government doesn't need to make a profit, meaning it's products can be sold for exactly how much their worth, less than the private sector, freeing up disposable income for saving and spending.

What? Opinion polls are not the same as demand ... AT ALL.

And lol at the government being answerable to the electorate. The government is only answerable to itself and the special interests that get the politicians elected.

Profit does guarantee efficiency, because it indicates that there is demand for the product. A product is worth whatever people are willing to pay for it. Profits come from people willing to pay for a product at a certain price. Furthermore, competition ensures that the vast, vast majority of businesses cannot use monopoly pricing (and the few that can are usually directly related to the government).

The government doesn't need to make a profit, so it can continually supply things that people don't actually want and simply raise taxes, borrow money, or inflate the money supply to pay for it. And the politicians have no personal incentive to supply goods efficiently. In fact, they have an incentive to supply goods inefficiently, using up resources to get pet projects passed that will win the support of the interest groups that make campaign donations.

Businesses, on the other hand, have to get money directly from their consumers (while the government can just TAKE your money through taxes). The only way a business can get your money is if you CHOOSE to purchase their product. So they have an incentive to offer you a good product so that you will buy it. And the heads of the business usually have their salaries tied to profit, i.e. how much they actually satisfy consumers.

Want to bet? Let's imagine we destroyed all the roads in the USA. What would be the effect upon the economy then? Everyone would have to walk/ride to work. This would result in lost productivity.

Yes, a massive loss of accumulated capital would harm the economy.

But when politicians talk about stimulating the economy through infrastructure, they're talking about wasting money fixing roads that DON'T need to be fixed. (if a road really needed to be fixed, it would have been fixed during the boom time). Politicians suddenly come up with all these infrastructure needs that didn't exist until the recession hit... strange, wouldn't you say?

Oh and I'm pretty sure that Obama's stimulus measures targeted R&D pretty heavily as well.

Much better than infrastructure, at the least.

Okay, when the Hoover Dam was finished being constructed, what happened to the workers working on the project? I'm pretty sure all those labourers had to find work elsewhere.

I don't know about that project in particular, but if the Hoover Dam didn't need to be built, they would have found useful labor much sooner.

Also, why is it not a problem in this case for the government to cause unemployment by releasing those workers?

No. If there are more people than jobs, then there will be unemployment. And even if the markets readjust, it's a readjustment that makes everyone poorer.

It's a readjustment that makes those particular workers poorer, while making everyone else richer.

The opposite is true if those workers keep their jobs making things that there isn't any demand for. Those workers are better off, but everyone else is worse off (since those workers aren't being put towards useful labor, and also their salaries will likely be financed through taxes).

Also, you have the idea of a "job" backwards. A job is not a fixed good. A job is actually demand from a company, and the workers are the supply. The workers are the fixed good here. There is no static number of jobs, there are only workers that happen to be employed.

Addressed above.

I think it's a good example to use McDonald's burgers or whatever other good for comparison. Markets adjust.

But the private sector has incentives to charge higher prices, because of the profit motive. The government does not need to make a profit and if its services are poorer it loses government.

What's worse for the economy, me putting a computer together for $400 and selling it to you for $800, or me putting a computer together for $1000 and FORCING you to buy it for $1000?

The main problem of the government is OVERSUPPLYING things, since they have no incentives to ever cut costs. If a private company is making computers that no one wants (i.e. making negative profits), then it STOPS MAKING THEM. The government, on the other hand, gets your money no matter what.

Uh... Although monopolies are inefficient, the reason for their inefficiency is because of the profit motive. They charge high prices simply because they can. Whereas a government monopoly has no reason to make profit. They don't need/want to charge more for their goods than the cost of creating them.

The reason for their inefficiency is the lack of competition.

The government, since it already has your money regardless of what you do, has no incentive to provide good services. A monopoly at least has to entice you to buy its product at all.

Also, once again the government has no incentive to cut costs, or shop around. A monopoly will at least try to produce its goods efficiently by looking for cheaper methods of production (i.e. methods that use up fewer resources). The government has no incentive to do this.

Also, let's not kid ourselves here: the government is making a huge profit. While it drives the nation into debt, its politicians and workers get paid salaries with generous benefits.

Well... Some things are necessary in society. Schools, policemen, a justice system, a military etc. Without these things, society grinds to a halt, so it makes sense to force everyone to pay for them.

Does that include ALL of the things the government spends on?

And private schools are also more expensive than public schools because they have to make a profit.

Actually, did you know that the US spends about $10,000 per student (if I remember correctly)? I think you could definitely run a private school with that sort of tuition. But seriously, the effect I mentioned is quite large, since NO ONE that is poor or even lower middle class will be able to pay even $5,000 tuition (on top of taxes) when there is a "free" public school

 

[Bob Jane T-Mart]

Until prices fall enough to reach equilibrium again ... and entrepreneurs and businesses take advantage of cheap labor to make things people ACTUALLY WANT.

Okay, having prices fall enough to reach equilibrium in a depression like that would result in society getting a whole lot poorer. I do not think that is necessary.

Let's consider what happens when you try to stimulate the economy:

Businesses close, leading to high unemployment. The government takes all these people and sets them to work digging ditches and filling them in again. Now, to pay all these workers, the government has to either borrow money (increasing national debt, and taking available credit away from businesses), raise taxes (putting more of a burden on the few employed people in the private sector, and leading to more unemployment) or cause massive inflation (leaving anyone who has any money saved up nearly penniless). All three of these alternatives will only hurt the private sector EVEN MORE. More businesses close, leading to more unemployment, and the cycle starts anew. Except it's even worse since we have a bunch of laborers getting paid to do inefficient work.

WTF? That's a strawman, the government's stimulus measures are far from useless.

And the Great Depression went on for another 6+ years.

Yes, but it actually improved the situation.

What connection ... can you be more specific? Or just look at my response above.

Please explain how government employment prevents the private sector from creating jobs?

What? Opinion polls are not the same as demand ... AT ALL.

You can actually measure the demand for a certain government or government service/product with opinion polls. BY ASKING THE PEOPLE.

And lol at the government being answerable to the electorate. The government is only answerable to itself and the special interests that get the politicians elected.

Huh? The government is a democracy.

Profit does guarantee efficiency, because it indicates that there is demand for the product. A product is worth whatever people are willing to pay for it. Profits come from people willing to pay for a product at a certain price. Furthermore, competition ensures that the vast, vast majority of businesses cannot use monopoly pricing (and the few that can are usually directly related to the government).

I don't see how people being willing to pay for a product at a certain price does guarantees efficiency. I can understand competition ensuring efficiency, but not profit.

The government doesn't need to make a profit, so it can continually supply things that people don't actually want and simply raise taxes, borrow money, or inflate the money supply to pay for it. And the politicians have no personal incentive to supply goods efficiently. In fact, they have an incentive to supply goods inefficiently, using up resources to get pet projects passed that will win the support of the interest groups that make campaign donations.

If the government continually supplies things that people don't actually want and raises taxes to pay for it/inflates the money supply/borrows money, would it not be kicked out of office?

Yes, a massive loss of accumulated capital would harm the economy.

Okay, let's say that a government is elected on the promise that they will build a super-fast mass-transit system. This would reduce traffic congestion and increase productivity as people can spend more time working. Would that not benefit the economy?

But when politicians talk about stimulating the economy through infrastructure, they're talking about wasting money fixing roads that DON'T need to be fixed. (if a road really needed to be fixed, it would have been fixed during the boom time). Politicians suddenly come up with all these infrastructure needs that didn't exist until the recession hit... strange, wouldn't you say?

Okay, first of all those things are often infrastructure wants and not needs. And if they're talking about fixing roads, maybe the weren't fixed during the boom periods because they didn't need to be fixed. Roads deteriorate over time.

I don't know about that project in particular, but if the Hoover Dam didn't need to be built, they would have found useful labor much sooner.

How do you know that they would have found useful labour much sooner if they were left to fend for themselves?

And the Hoover Dam was pretty useful actually.

Also, why is it not a problem in this case for the government to cause unemployment by releasing those workers?

Perhaps because the government releases the workers when they have a far better chance of finding a job.

It's a readjustment that makes those particular workers poorer, while making everyone else richer.

If your workers are poorer on the whole, your consumers would be poorer. Poorer consumers means poorer businesses and poorer businesses means poorer works. This creates a nasty downward spiral.

The opposite is true if those workers keep their jobs making things that there isn't any demand for. Those workers are better off, but everyone else is worse off (since those workers aren't being put towards useful labor, and also their salaries will likely be financed through taxes).

That assumes that the workers are producing useless stuff. They often are not.

Also, you have the idea of a "job" backwards. A job is not a fixed good. A job is actually demand from a company, and the workers are the supply. The workers are the fixed good here. There is no static number of jobs, there are only workers that happen to be employed.

Although that is true, markets can produce surplus supply that goes unused. This is known as unemployment in this context.

What's worse for the economy, me putting a computer together for $400 and selling it to you for $800, or me putting a computer together for $1000 and FORCING you to buy it for $1000?

That assumes that the government cannot produce anything at all well. I suppose privatising the generation of electricity would lower prices then. Oh wait it doesn't.

The main problem of the government is OVERSUPPLYING things, since they have no incentives to ever cut costs. If a private company is making computers that no one wants (i.e. making negative profits), then it STOPS MAKING THEM. The government, on the other hand, gets your money no matter what.

Again, democracy is the answer to this point.

The reason for their inefficiency is the lack of competition.

Democracy. Other political parties provide competition.

Also, let's not kid ourselves here: the government is making a huge profit. While it drives the nation into debt, its politicians and workers get paid salaries with generous benefits.

That's like saying a business is making a profit if it pays its employees.

Does that include ALL of the things the government spends on?

No. But in a democracy nothing is really forced, it's chosen by the representatives of the public.

Actually, did you know that the US spends about $10,000 per student (if I remember correctly)? I think you could definitely run a private school with that sort of tuition. But seriously, the effect I mentioned is quite large, since NO ONE that is poor or even lower middle class will be able to pay even $5,000 tuition (on top of taxes) when there is a "free" public school

I wouldn't bet on it.

 

[ballin4life]

Okay, having prices fall enough to reach equilibrium in a depression like that would result in society getting a whole lot poorer. I do not think that is necessary.

How do falling prices make society poorer?

Falling prices in general actually make society richer in a lot of ways since they represent increased productivity. For example, computers have been falling in price for years, because we have gotten much more productive at making them.

Falling wages aren't good for a worker relative to his old situation, but they are better for employers and consumers.

WTF? That's a strawman, the government's stimulus measures are far from useless.

The argument for stimulus does not revolve around the government stimulus measures being useful - Keynes himself gave the example of people digging holes and filling them back in, saying this would help the economy.

Anyway, the government's spending is inefficient compared with the private sector, since the government doesn't have to respond to actual demand.

Yes, but it actually improved the situation.

Compared to what? How do you know?

The depression going on for another 6 years doesn't look like good evidence in your favor, considering that no other recession lasted as long. Here's the part where you claim that it was due to Roosevelt tightening the budget, as if that instantly caused the economy to flounder and everything would have been just fine if he kept spending (not to mention the fact that he DID keep on spending; spending did not ever drop to pre New Deal levels)

Please explain how government employment prevents the private sector from creating jobs?

1) The government workers are no longer looking for a job. Duh.

2) The government has to pay those workers somehow. The money has to come from somewhere. This is a point a lot of people seem to miss. All 3 options (taxation, borrowing, and inflation) take money out of the private sector.

You can actually measure the demand for a certain government or government service/product with opinion polls. BY ASKING THE PEOPLE.

This isn't demand. Of course people are going to say they want a government program when they are getting it for "free". Demand is your willingness to pony up your own money in exchange for something.

Huh? The government is a democracy.

For starters, no it isn't, it's a republic.

Anyway, are you downplaying the role of special interests in the government? And what does "election power" mean when the other candidate is just as bad?

I don't see how people being willing to pay for a product at a certain price does guarantees efficiency. I can understand competition ensuring efficiency, but not profit.

Have you ever done economics?

Anyway, the quick way to explain it is:

I have a computer
You have $600

We agree to trade my computer for your $600. We are both better off from this deal (otherwise we wouldn't have agreed to it).

If the government continually supplies things that people don't actually want and raises taxes to pay for it/inflates the money supply/borrows money, would it not be kicked out of office?

This has been happening buddy. The other guys are just as bad, because the incentives of government officials are all screwed up.

Okay, let's say that a government is elected on the promise that they will build a super-fast mass-transit system. This would reduce traffic congestion and increase productivity as people can spend more time working. Would that not benefit the economy?

Maybe, or maybe not. That's what the market is good at determining. Perhaps demand for this mass-transit would be really high, so that the demand for it would be higher than the cost of making it. Then an entrepreneur would stand to make a bunch of money from producing the mass-transit system. If the entrepreneur is wrong and the demand is actually low, then he stands to lose a bunch of money and time. So he has a HUGE incentive to figure out whether it will really be efficient to produce it.

The government, on the other hand, has little reason to look at costs. If they think that the mass-transit system will help them get elected, the politicians will do it. Then the people get stuck with a huge bill for all the construction. Meanwhile, the politicians have no personal stake in the mass-transit system. They do not have the chance to gain or lose large sums of money, so they have little incentive to figure out if the system is really worth it.

And this has happened. See Amtrak.

Okay, first of all those things are often infrastructure wants and not needs. And if they're talking about fixing roads, maybe the weren't fixed during the boom periods because they didn't need to be fixed. Roads deteriorate over time.

Some roads do need to be fixed. But it would be really bad to waste tons of resources on roads that don't need to be fixed.

How do you know that they would have found useful labour much sooner if they were left to fend for themselves?

How do you know they wouldn't?

I say they would find labor because they really, really want to work. I mean, we DO see this happening in spite of the government. People who lost their jobs will at least take part time work to make ends meet.

And the Hoover Dam was pretty useful actually.

As I said, I know nothing about the Hoover Dam in particular.

Perhaps because the government releases the workers when they have a far better chance of finding a job.

How do they magically have a better chance of finding a job?

It sounds like you're boiling down to "stimulus works because it does".

If your workers are poorer on the whole, your consumers would be poorer. Poorer consumers means poorer businesses and poorer businesses means poorer works. This creates a nasty downward spiral.

SOME workers are poorer on the whole, while ALL THE OTHER consumers are richer, because less money is getting taken out of the private sector.

That assumes that the workers are producing useless stuff. They often are not.

But they are always less efficient than private sector workers who have to respond to actual consumer demands.

Although that is true, markets can produce surplus supply that goes unused. This is known as unemployment in this context.

And you know what surplus supply leads to?

Reduced prices.

Ever seen a clearance sale? Prices fall until the market clears. While this is painful for those workers who must accept a lower wage, it is good for the rest of us since we will be able to get cheaper goods.

That assumes that the government cannot produce anything at all well. I suppose privatising the generation of electricity would lower prices then. Oh wait it doesn't.

Uh, I didn't say it was the case for all things the government produces. Congrats on possibly stumbling upon the "Natural Monopoly" theory.

Anyway, I'm not sold on the article at all, but it doesn't matter for this argument because the government produces electricity in both booms and busts. Electricity has nothing to do with government stimulus measures.

When the government tries to create jobs from nothing, it's not much of a wonder that they aren't very efficient.

Again, democracy is the answer to this point.

We're going to vote on how many computers to make now?

Democracy. Other political parties provide competition.

Not really, especially in the 2 party system.

Politicians all just use their influence to pay off the interest groups that donated to their campaign and got them elected.

That's like saying a business is making a profit if it pays its employees.

Uh ... that kinda is the case, since a business will shut down and stop paying its employees if it doesn't make profit. The government on the other hand only drives the country into more debt.

No. But in a democracy nothing is really forced, it's chosen by the representatives of the public.

"In a democracy nothing is really forced" - I didn't agree to anything the politicians do. So it looks like I'm being forced.

I wouldn't bet on it.

Wouldn't bet on what? That private schools with low tuition could exist without the government? Do you not understand how public schools crowd the private out of the market?


By the way, if you think the government is so efficient then why did socialism fail in your opinion?

 

[Bob Jane T-Mart]

How do falling prices make society poorer?

Falling prices in general actually make society richer in a lot of ways since they represent increased productivity. For example, computers have been falling in price for years, because we have gotten much more productive at making them.

Falling wages aren't good for a worker relative to his old situation, but they are better for employers and consumers.[/QUOTE]

I was referring to the price of labour. If the price of labour falls, workers get poorer. Oh and workers are consumers. And mind you, the equilibrium that the economy will adjust to would be worse (in terms of growth) than what it was before the depression. So maybe, adjusting to the equilibrium would not be such a great idea.

The argument for stimulus does not revolve around the government stimulus measures being useful - Keynes himself gave the example of people digging holes and filling them back in, saying this would help the economy.

Yeah, it might actually, it's just even better if the government's stimulus measures are useful.

Compared to what? How do you know?

Before Roosevelt introduced stimulus measures.

The depression going on for another 6 years doesn't look like good evidence in your favor, considering that no other recession lasted as long. Here's the part where you claim that it was due to Roosevelt tightening the budget, as if that instantly caused the economy to flounder and everything would have been just fine if he kept spending (not to mention the fact that he DID keep on spending; spending did not ever drop to pre New Deal levels)

I might be wrong on this, but no other recession was really as severe as the Great Depression from the outset. President Hoover sat on his arse while the situation worsened.

1) The government workers are no longer looking for a job. Duh.

In an environment with high unemployment, there will be surplus people looking for jobs.

2) The government has to pay those workers somehow. The money has to come from somewhere. This is a point a lot of people seem to miss. All 3 options (taxation, borrowing, and inflation) take money out of the private sector.

However, paying these workers puts the money back into the private sector. They are then able to spend that money and it flows back into the economy.

This isn't demand. Of course people are going to say they want a government program when they are getting it for "free". Demand is your willingness to pony up your own money in exchange for something.

Well, what if we tack on a clause that would ask the respondents whether they'd like to pay for their share of it?

For starters, no it isn't, it's a republic.

With democratically elected representatives?

Anyway, are you downplaying the role of special interests in the government?

No.

And what does "election power" mean when the other candidate is just as bad?

You don't know that both candidates are just as bad.

Have you ever done economics?

Not really, I'm just an idiot with all too many opinions.

We agree to trade my computer for your $600. We are both better off from this deal (otherwise we wouldn't have agreed to it).

Right, that assumes that the people are actually able to judge whether they'll be better off from this deal. I disagree. As many of us, know people are irrational.

Maybe, or maybe not. That's what the market is good at determining. Perhaps demand for this mass-transit would be really high, so that the demand for it would be higher than the cost of making it. Then an entrepreneur would stand to make a bunch of money from producing the mass-transit system. If the entrepreneur is wrong and the demand is actually low, then he stands to lose a bunch of money and time. So he has a HUGE incentive to figure out whether it will really be efficient to produce it.

The government, on the other hand, has little reason to look at costs. If they think that the mass-transit system will help them get elected, the politicians will do it. Then the people get stuck with a huge bill for all the construction. Meanwhile, the politicians have no personal stake in the mass-transit system. They do not have the chance to gain or lose large sums of money, so they have little incentive to figure out if the system is really worth it.

And this has happened. See Amtrak.

Okay, so the answer is maybe. Lovely.

How do you know they wouldn't?

I don't know, maybe because unemployment was sky-high?

I say they would find labor because they really, really want to work. I mean, we DO see this happening in spite of the government. People who lost their jobs will at least take part time work to make ends meet.

Yes, then explain why there was unemployment.

How do they magically have a better chance of finding a job?

Well, maybe, that the government uses stimulus measures until the economy improves. Or maybe the unemployed gain skills?

And you know what surplus supply leads to?

Reduced prices.

Ever seen a clearance sale? Prices fall until the market clears. While this is painful for those workers who must accept a lower wage, it is good for the rest of us since we will be able to get cheaper goods.

But, I would say that in general most consumers are workers.

Uh, I didn't say it was the case for all things the government produces. Congrats on possibly stumbling upon the "Natural Monopoly" theory.

Anyway, I'm not sold on the article at all, but it doesn't matter for this argument because the government produces electricity in both booms and busts. Electricity has nothing to do with government stimulus measures.

When the government tries to create jobs from nothing, it's not much of a wonder that they aren't very efficient.

No, my point was that the government in some instances is actually better than the private sector at providing a good/service. This means that it's erroneous to suggest that the private sector is always better/more efficient than the government at providing goods and services, meaning that stimulus measures may not be as inefficient as you believe.

Not really, especially in the 2 party system.

I'll have to concede that.

Politicians all just use their influence to pay off the interest groups that donated to their campaign and got them elected.

But, if they do anything completely stupid they will get pushed out of office.

Uh ... that kinda is the case, since a business will shut down and stop paying its employees if it doesn't make profit. The government on the other hand only drives the country into more debt.

It is a fact that a number of businesses run at a loss for periods of time while still employing people.

"In a democracy nothing is really forced" - I didn't agree to anything the politicians do. So it looks like I'm being forced.

Yes, but you elected them to represent you, so you're not as forced as you would be in a dictatorship.

Wouldn't bet on what? That private schools with low tuition could exist without the government? Do you not understand how public schools crowd the private out of the market?

I wouldn't bet that private schools could run on less money than the government spends on a public schools. I know for a fact that some private schools run at the moment at twice that level.

By the way, if you think the government is so efficient then why did socialism fail in your opinion?

There is a fine balance between too much government involvement in an economy and too little. It so happens that this fine balance involves the private sector as well as the public sector because they are both good at doing different things, and worse at doing others. Socialism had too much government involvement.

And I'm kinda getting sick of this debate, it's going around in circles.

 

[ballin4life]

Hoover was very interventionist; he definitely didn't sit and do nothing.

I didn't elect anyone to represent me.

Current private schools are expensive because they HAVE TO cater to the rich, as I said before. Youtube John Stossel Stupid in America for more details on problems in the US school system.


But my biggest beef is your claim that most people don't know what's best for them. You're saying that people routinely make mistakes like buying a computer while not realizing that it isn't really worth it to them. I'm not saying this never happens, but it's pretty rare. Do you wind up regretting 90% of the purchases you make? Also, who else besides the individual can make these value decisions.

 

[Aesir]

lol the Great Depression went on for 14 more years after Roosevelt got elected, and it's not like the New Deal stopped completely. Not to mention the fact that Hoover tried to stimulate the economy too.

The problem roosevelt faced was trying to balance the budget after the economy began to improve. It wasn't until World War II which allowed for more money to be spent, over a much longer period of time did we see real growth. The point of fiscal policy is to stop the bleeding so the economy can recover. it's not meant to replace markets.

Hoover is an example of good intentions gone wrong. He didn't want to set up a welfare state, nor did he attack any of the real problems, there were little to no reform measures in place during his administration. Instead he raised Tarriffs would made the depression even worse because in responce foriegn countries did the same thing.

Also he almost trippled the tax rate, which is something you really shouldn't do during a depression. You're suppose to cut taxes and increase spending, not raise taxes.

What metrics are you using to say the economy improved under Roosevelt's initial stimulus? Especially when my entire argument is that GDP is NOT a good measure of economic growth for Keynesians, and that stimulating the economy results in lower long run GDP anyway.

What would you say is a good measure? Because the underground economy isn't anywhere near as robust to warrent GDP percentages useless. For better or worse it's the most accurate assessment we have.

Jobs are not the goal of an economy. Everyone in the Soviet Union had a job, but their economy was terrible. We could pay people to dig ditches and fill them in again, but this would not be good for the economy. Jobs are good when they produce something useful.

I would never say that having an economy built around digging ditches is good, hypothetically for short term relief it's better for people to be paid doing something, then leaving the problem to fend for it's self. Instead I would say more money into rebuilding infrastructure, public works, what have you. Having people build things that are useful, or providing useful services is good.

Also any thoughts on the Depression of 1920? Where the government "sat back and did nothing"? Not to mention every other recession before the Great Depression?
http://en.wikipedia.org/wiki/Depression_of_1920–21

That's a good example of what happens when you raise interest rates after a war. That's simply a human error and not really a problem with fiscal policy. It's pretty common sense now a days to not jack interest rates that high after a war, especially when the economy is having trouble going form a war time economy to a peace time economy.