So I don’t have lyrics for this Henri Mancini instrumental, but having seen an obviously pre-prepared report by Mark Zandi, one of the nation’s leading “teleconomists,” and another of the Keynesians that have touted government spending as a way to salvation, I simply have to comment.
Zandi, like most Keynesians have a religious belief in a concept called the Multiplier. They use these multipliers to justify everything from the effects of policy to what they have for breakfast each morning. He uses multipliers – ranging from very low ones assigned to tax cuts, to very high ones assigned to pretty much any spending increase – to justify his numbers. Unfortunately, while may multipliers make some sense in micro (or industry level) economics, they are basically useless for understanding macroeconomic policy. Lets look at an example.
Say that a change in blue laws allows retailers in a state to sell alcoholic beverages on Sundays (a microeconomic example as we are looking at only one market). This policy change will encourage consumers to purchase more beer, wine and spirits, leading to more liquor store sales, more jobs, more wages, more taxes etc. This is because, as multiplier theory suggests, there is an external factor impacting the market, and this factor is MULTIPLIED as the new money works its way through the beverage alcohol sector. These benefits are offset in part by losses in other industries as consumers transfer some purchases to beer, wine and spirits, but generally policy changes like this result in less distortion and more productivity in the economy (for example the use of a liquor store’s assets increase by one-seventh) so the benefits outweigh the costs.
Now, let’s look at the kind of macroeconomic spending being proposed by the President, say for example spending $30 billion for school renovations. In this case, just as with the beverage alcohol example there will be (microeconomic) benefits to the school construction and fixing up industries as new resources are injected into that sector from outside. This will create new jobs, wages, etc. as this money is multiplied through that sector. But in this case, we are looking at spending coming from the Federal government. This money is not coming from outside of the US economy, but rather must either come from taxes, more borrowing or from the Federal Reserve in the form of printed notes.
If the money comes from new taxes, then those paying the taxes must refrain from spending this money in other sectors – many of which will have higher multipliers than school fix-ups. So for every new job created painting a classroom, there will be less jobs fixing cars, providing restaurant meals, or operating movie theaters. A similar effect happens when government borrows to spend the money. In this case, the increased government borrowing raises interest rates above what they would otherwise be, leading to higher credit card bills, higher mortgage and car payments and higher costs for businesses wanting to invest in new plant and equipment. Again, while jobs are created in schools, they are lost in car dealers, manufacturing plants and real estate offices.
Owing to the current political environment it is likely that this stimulus would be paid for in the same manner as the last. The Federal Reserve will “buy” treasury notes with Federal Reserve Notes. In other words, the government will print money. When this happens we all pay a tax known as inflation – the value of each and every dollar that we have (all of our dollar denominated assets, the value of our homes, the stocks and bonds that we hold, the value of our firms) falls. Again, this leads to less investment and spending offsetting any economic benefit generated by painting schools.
Therefore, no matter how the government generates this money, the costs will at a minimum equal any benefits – and frankly as Mr. Zandi points out – the cost of the President’s proposals may actually be greater than the benefits.
I’m not suggesting here that fixing up schools is a bad idea, but that it does not somehow “create” jobs in the overall economy. Simply put, there is no free lunch. The idea that government spending by itself generates massive wealth and employment opportunities just does not stand up to the basic principles of common sense – or even economics.