From all, to all

Dot: My question was rhetorical.

So is May.

@jwl – that assumes the tax decrease gets spent. Normally that would be true.

But right now people are using extra cash to de-leverage, as are banks, businesses (story on this in some paper today, but it’s irrelevant – the story is correct).

It is not as clear that a tax decrease would yield as much.

Regardless, I think this stimulus approach is getting a bit out of hand.

(I won’t throw up links here because it tends to end up delaying publication. For those interested in confirmatory links on those numbers, though, it’s over at my own humble (and not government-financed in any way) site. Link’s to the left.)

jwl, think about it. The point is to stimulate consumption, right? Consumption is spending money to buy goods or services, right? Consumption ensures that there is a market for your goods and services, right? Which means your employees get to keep their job and you get to keep your business, right?

Well, government spending is spending. So it’s consumption. So there’s a market for goods. So there’s a need to produce those goods. So people get jobs producing those goods. And since it’s government spending, it’s predictable and safe, since governments aren’t going to go bankrupt on you and tend to spend on big multi-year projects. So you can consume yourself.

Tax cuts, meanwhile, often just get squirreled away, or used to pay down debt. And while paying down debt is both admirable and a good individual idea, it doesn’t do a damned thing for stimulating the economy, because that money isn’t being spent and so isn’t prompting people to producing anything and so isn’t doing a thing for job growth or security.

And if there’s no job security, guess what? People hoard all the more. Which means less spending etc. Basic macroeconomics.

“The Harper Conservatives have never acted like fiscal conservatives since they took office, you have said so yourself on various occasions. Political expediency wins out over ideology every time for Harper.”

Same was true for the Mulroney PCs. It really seems to be a sad fact of life, but voting (Progressive) Conservative, does NOT result in fiscal conservatism. The Chretien Liberals, OTOH, reined in the Mulroney era’s massive deficits, and went on to produce surpluses: i.e. spending did not exceed revenues. One can argue that the Chretien Liberals spent too much, or spent on the wrong things, or did not properly monitor how money was spent (gun registry comes to mind); but they did not spend money that wasn’t there (after taming Mulroney’s deficit).

I have a theory that perhaps only Liberals can form a fiscally conservative government. The reason being that when the Conservatives form a government, all opposition parties are to the left of them (or at least, nominally so), and thus pulling on the Conservatives to spend more money. If the Conservatives don’t spend, they are “heartless bastards”; if they do, well good bye fiscal rectitude. The Conservatives, feeling the precariousness of their electoral success, eventually opt for the latter. However, when the Liberals form a government, in addition to the NDP and BQ on the left constantly pulling for more spending, you have the Conservatives on the right pulling for less spending and being extremely eager to point out spending screw ups (e.g. again gun registry). It also helps that when Liberals don’t spend or make actual cuts, they at least seem to do so reluctantly; whereas the optics, if nothing else, are that the Conservatives do so with relish. This make it easier for Liberals to do the needful and harder for Conservatives. So, to get a fiscally responsible government, it may be necessary to vote Liberal – a sad state of affairs, but apparently what we are stuck with. An “only Nixon could go to China” kind of thing.

It is savings and investment which create wealth, not consumption. If Demosthenes was correct then the richest family on your block would be the ones that run up gigantic credit card debts and treat their home equity as an ATM machine to fund cars and vacations, rather than the family who works long hours and invests their money in solid businesses. As with individuals so it is with nations.

The poverty-creating policies advocated by Keynes are however extremely popular. Popular with the public because they are comforting fairy tales in which throwing money away on toys and luxuries is deemed to be wise. Popular with politicians because telling fairly tales is a good way to win elections in the short term, and in the long term the poverty produced by throwing away the national savings is a good excuse to implement massive government intervention.

Inoculate yourself from economic fairy tales by reading “Spotlight on Keynesian Economics” and other papers at the von Mises institute. Your children will thank you.

Demosthenes it seems you are economically literate, so I am keen to have your insights.

I was tripped up by the link moderation system this weekend, but since this is the topic of the decade, I wonder if you could give us your thoughts on what Yves Smith has to say about this:

/www.nakedcapitalism.com/2008/12/deflation-has-become-inevitable.html

In particular, I found the following comments interesting:

Now to my doubts about the proposed remedies, namely monster stimulus and monetary easing. First, as mentioned before, the analogy is to the US in the Depression, which we have said repeatedly before is questionable. The US in the 1920s was the world’s biggest creditor, exporter, and manufacturer. Our position then is analogous to China’s now. Indeed, Keynes in the 1930s urged America to take even more aggressive measures, and argued that it was not reasonable for the US to expect over-consuming, debt-burdened countries like the UK and France to take up the demand slack. So even though most economists are invoking Keynes, it isn’t clear he’d prescribe such aggressive stimulus for the US and UK now.

Second, the argument is that the US in the 1930s and Japan in its post bubble era failed to engage in sufficiently large stimulus. That is mere conjecture; there is no way to prove that argument (we cannot go back in a time machine and test different remedies in both economies).

In the US, the claim generally made is that the US did not emerge conclusively from the Depression until it engaged in massive wartime spending starting in 1939-40, and therefore a stimulus of perhaps that large a magnitude is required. However, quite a lot happened between 1930 and 1939, including going off the gold standard, the securities law reforms of 1933 and 1934, the creation of the FDIC, refinancing homeowner debt to longer-term mortgages via the Homeowner’s Loan Corporation, and the closure of a lot of business, some of which were probably victims of circumstance, but others probably deserved to be put out of their misery.

There is another huge extenuating circumstance with the war spending that observers choose to forget. The US’s problem in 1929, like China’s appeared to be (at least in part) overproduction, that there might be too much global capacity relative to consumer demand (that is certainly true for the auto industry now, which had managed to forestall the day of reckoning by converting consumers to leases that had them trading in cars after 3 years, when buyers generally keep them longer, Decreasing the effective life of cars was tantamount to increasing demand). In addition, the US suffered a fall in GDP of 11% in 1946 and 1% in 1947 in transitioning off a wartime economy.

But perhaps more important, at the end of WWII, productive capacity in the next two biggest industrialized nations, Germany and Japan, had been destroyed. The US had effectively no competition for its bulked up industrial capacity.

Also, as I posted earlier, I have grave concerns about the ability of every country in the world to simultaneously increase its debt, in an environment where US treasury bills are being issued at a rate that is incomprehensible to anyone who isn’t an astrophysicist.

It seems to me that if all the G8 countries are rapidly issuing bonds that the ability to lower interest rates is going to be severely curtailed. If the credit markets are truly “broken” due to a lack of demand for anything but US Treasuries, increasing the supply of other government securities seems unlikely to have any predictable consequences.

I did write on Paul Wells’ blog wondering if Harper will give Harper Days to his civil servants some day.

Seems to me that spending on consumer goods is unlikely to give us nearly as much of an economic multiplier as spending on infrastructure, in part because, last time I checked, nearly all consumer goods sold at the mall were made in China, not in Canada. In contrast, building infrastructure — for example, a national HVDC grid to help us harvest wind power from all over the Prairies and deliver it to major cities, or fast trains in the Montreal-Ottawa-Toronto corridor, or thorium reactors, or even just a massive energy efficiency building retrofit program — these kinds of things would both create wealth, on a lasting basis, and stimulate the Canadian economy, because they’d rely on Canadian inputs and workers. Also, I’m not even sure this has to be done with deficit spending. It could be achieved by having the government lend money to itself, i.e. by having the Bank of Canada issue low- or no-interest loans to agencies of the Government of Canada, loans which could, in time, be quitely forgiven. Printing money only creates inflation if the money printed is not used to create an amount of new wealth corresponding to the increase in the money supply resulting from printing that money. This is why printing money and throwing it from helicopters to waiting crowds below is a bad idea (and printing money via loose credit to stimulate consumer frenzies amongst people who may not be able to pay back those loans is a worse idea), but printing money and using it to build real long-term wealth-generating infrastructure is, quite possibly, a brilliant idea. As long as it’s done at an appropriate scale, and projects are chosen well and managed intelligently (which might happen if project managers are paid largely by cleverly formulated, measurable performance criteria, rather than straight salaries).

“Deficits are no longer to be avoided. They’re “essential.” Spending is no longer to be controlled. It’s “stimulus.”

Is there where I get to say, “I told you so“?

Bloomberg is reporting that the new US “car czar” may have the power to force bankruptcy on the automakers

/www.bloomberg.com/apps/news?pid=20601087&sid=azwJTERWg9tI&refer=home

Here is the text of the letter I sent to the Minister of Finance:

“The Honourable James M. Flaherty, P.C., M.P. Minister of Finance”
date Sun, Dec 14, 2008 at 9:21 AM
subject Spending provisions for automotive manufacturers

Dear Mr Flaherty,

I am writing to express my concerns about the spending provisions recently announced for US automakers operating in Canada.

I have recently returned to Canada after living overseas for the past seven years. I am not a member of any political party or news organization. I am a private individual who is concerned about my family, my community and the economic health of my country.

I understand that the situation is changing as I write this, and I am confident that the government is taking steps to ensure that funds are allocated responsibly. However I hope you can reassure me about some specific issues:

1. Can you confirm that the three firms entitled to receive these funds are GM Canada Limited, Ford Canada Limited, and Chrysler Canada Limited?

2. Can you stay whether and how the privately-owned Chrysler will be treated relative to the other two firms?

3. One report indicated that US Government is taking a 20% equity stake in GM. Will the Government of Canada also receive warrants with the terms of this deal?

4. Another report indicated that the US government is mandating management changes and instituting an “auto czar” to provide governance. Will the Canadian government be insisting on management changes in the firms? What guarantees do we have that the government will stay out of the car business?

5. What will be the priority for repayment of the debt to the Canadian government if one or more of the US manufacturers files for bankruptcy under the provisions of Chapter 11 of the US Bankruptcy Code? Will the Canadian government have the same rights as a Debtor in Possession under the terms of US Law?

6. What legal recourse does the Canadian government have in case the US manufacturers use the funds provided by the Canadian people to support US operations instead of Canadian operations?

I am sure that your staff have been working hard at answering many of these questions to your own satisfaction. I would greatly appreciate any help they could provide to reassure me that the Government of Canada is still committed to conservative fiscal policies and liberal economic policies.