How (and why) to Ramble on your goat sideways
#941
Okay now WTF. I'm on my iPhone and Rcootes YouTube videos show up but all the others on this page just show me a little box. Sup wit dat?
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#948
I don't know what that means.
Edit: I did the Google. Some how I don't think that's the reason.
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Edit: I did the Google. Some how I don't think that's the reason.
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Last edited by levnubhin; 07-13-2010 at 10:42 AM.
#953
Boost Czar
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Stimulating Thoughts
by Russ Roberts on July 12, 2010
I’ve been thinking about Keynes lately and why it is that everyone just assumes that when government spends money, of course it helps the economy recover and creates jobs.
Let’s imagine four different scenarios.
1. Everyone in America wakes up to find they have an extra $500 in cash in their wallet. (This money is printed by the Fed and elves put it in everyone’s wallet without looking).
2. The government doubles the amount unemployed people receive. (The extra payments are created by printing money).
3. The government hires a bunch of workers to dig ditches and fill them back in. (The money to pay the workers and to buy the shovels comes from printing money.)
4. The government builds a bunch of bridges that are really useful. The money to pay for the cement and the workers comes from printing money.)
In scenario 1, Milton Friedman argued that people would find themselves holding excess cash. They would try to spend it. But in the short run, there is no more stuff to be had so the effect of the spending is to drive up prices. If the government persists in printing money at a faster rate than people want to hold it, some businesses may expand and hire workers but eventually, the impact of higher rates of money creation is also neutral–you get inflation.
What is the difference between scenario 1 and the other scenarios? The main difference between 1 and 2 is that people who are unemployed presumably have a higher propensity to spend the money than to save it. Suppose they spend all of it. Every penny. No savings. The impact on the economy will again be a mix of nominal and real effects. Prices will rise. Will there be real effects? Doesn’t that depend on how the businesses who receive more business respond to the increase in demand for their products? Are they going to raise price or expand output? Both? That’s a reasonable guess. The mix between nominal and real effects would depend on how much they have to pay new workers, how long they think there will be an increase in demand for their products, and so on. But confidence in the future would be a major factor.Is it unreasonable to think that what government spends the money on would affect their confidence in the future along with the expected level of taxes and other policy variables?
I confess that I don’t see a big difference between any of these scenarios. Nor would it seem to matter if the spending in scenarios 2-4 were financed with taxes or debt rather than printing money.
The usual critique of government spending as stimulus is that it ignores crowding out by other spending–if I think my taxes are going to go up, I’ll cut back and offset some of the increased spending by the bridge’s construction workers. But the problem as I’ve argued here is more fundamental. If businesses are worried about the future (ah those animal spirits), why won’t ANY form of stimulus, fiscal or monetary be dominated by nominal effects rather than real effects?
by Russ Roberts on July 12, 2010
I’ve been thinking about Keynes lately and why it is that everyone just assumes that when government spends money, of course it helps the economy recover and creates jobs.
Let’s imagine four different scenarios.
1. Everyone in America wakes up to find they have an extra $500 in cash in their wallet. (This money is printed by the Fed and elves put it in everyone’s wallet without looking).
2. The government doubles the amount unemployed people receive. (The extra payments are created by printing money).
3. The government hires a bunch of workers to dig ditches and fill them back in. (The money to pay the workers and to buy the shovels comes from printing money.)
4. The government builds a bunch of bridges that are really useful. The money to pay for the cement and the workers comes from printing money.)
In scenario 1, Milton Friedman argued that people would find themselves holding excess cash. They would try to spend it. But in the short run, there is no more stuff to be had so the effect of the spending is to drive up prices. If the government persists in printing money at a faster rate than people want to hold it, some businesses may expand and hire workers but eventually, the impact of higher rates of money creation is also neutral–you get inflation.
What is the difference between scenario 1 and the other scenarios? The main difference between 1 and 2 is that people who are unemployed presumably have a higher propensity to spend the money than to save it. Suppose they spend all of it. Every penny. No savings. The impact on the economy will again be a mix of nominal and real effects. Prices will rise. Will there be real effects? Doesn’t that depend on how the businesses who receive more business respond to the increase in demand for their products? Are they going to raise price or expand output? Both? That’s a reasonable guess. The mix between nominal and real effects would depend on how much they have to pay new workers, how long they think there will be an increase in demand for their products, and so on. But confidence in the future would be a major factor.Is it unreasonable to think that what government spends the money on would affect their confidence in the future along with the expected level of taxes and other policy variables?
I confess that I don’t see a big difference between any of these scenarios. Nor would it seem to matter if the spending in scenarios 2-4 were financed with taxes or debt rather than printing money.
The usual critique of government spending as stimulus is that it ignores crowding out by other spending–if I think my taxes are going to go up, I’ll cut back and offset some of the increased spending by the bridge’s construction workers. But the problem as I’ve argued here is more fundamental. If businesses are worried about the future (ah those animal spirits), why won’t ANY form of stimulus, fiscal or monetary be dominated by nominal effects rather than real effects?