Voice For Liberty

Tag: Economics

  • Economic Stimulus: Timing is Everything

    When I took macroeconomics in college way back in the 70’s, people actually believed in Keynesian economic theory. It was in the textbooks. One of the problems with government attempting to stimulate the economy the Keynesian way is the matter of timing. By the time we’re sure we’re in a recession, Congress passes laws, and the money is spent, the economy may be already out of the recession. Then, all the stimulus of the spending takes effect, the economy becomes overheated, and inflation becomes a problem. So goes the theory, anyway. This is only one of the problems inherent in the government trying to manage the economy. A Wall Street Journal column explains:

    According to Congressional Budget Office estimates, a mere $26 billion of the House stimulus bill’s $355 billion in new spending would actually be spent in the current fiscal year, and just $110 billion would be spent by the end of 2010. This is highly embarrassing given that Congress’s justification for passing this bill so urgently is to help the economy right now, if not sooner.

    The stimulus bill is also a time machine in the sense that it’s based on an old, and largely discredited, economic theory. As Harvard economist Robert Barro pointed out on these pages last Thursday, the “stimulus” claim is based on something called the Keynesian “multiplier,” which is that each $1 of spending the government “injects” into the economy yields 1.5 times that in greater output. There’s little evidence to support this theory, but you have to admire its beauty because it assumes the government can create wealth out of thin air. If it were true, the government should spend $10 trillion and we’d all live in paradise.

    See The Stimulus Time Machine, January 26, 2009 Wall Street Journal

  • Government Spending Is No Free Lunch

    Robert J. Barro, an economics professor at Harvard University and a senior fellow at Stanford University’s Hoover Institution, has an excellent commentary in The Wall Street Journal. This piece explains the problems with the multiplier that backers of government stimulus programs count on to make the government spending work. Here’s an excerpt:

    Back in the 1980s, many commentators ridiculed as voodoo economics the extreme supply-side view that across-the-board cuts in income-tax rates might raise overall tax revenues. Now we have the extreme demand-side view that the so-called “multiplier” effect of government spending on economic output is greater than one — Team Obama is reportedly using a number around 1.5.

    To think about what this means, first assume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy’s total output expands by enough to create the airplane or bridge without requiring a cut in anyone’s consumption or investment.

    The explanation for this magic is that idle resources — unemployed labor and capital — are put to work to produce the added goods and services.

    If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the added government spending is a good idea even if the bridge goes to nowhere, or if public employees are just filling useless holes. Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases.

    The full article is Government Spending Is No Free Lunch .

  • Just Say No to Stimulus

    “Congress should not enact an expensive spending bill under the pretense of stimulus or recovery. We cannot spend our way to prosperity, and such an expansion of the federal government will put a crushing burden on taxpayers in the long-term.”

    That’s the online petition at NoStimulus.com. This website, a project of Americans For Prosperity, provides some useful information about the proposed economic stimulus package and its ramifications.

    In particular, the facts page briefly explains the problems with the proposed stimulus package and why it isn’t a good idea for America.

  • Wind power: look at costs of “boom”

    There’s been a lot of investment in Nolan County, Texas. Things are booming.

    That’s pretty much the entire point of an op-ed piece in the Wichita Eagle by Scott Allegrucci. (Money Blowing in the Wind in Texas, January 16, 2009)

    He’s the director of the Great Plains Alliance for Clean Energy, based in Topeka. This organization’s website states that “GPACE seeks to correct an imbalance in the information citizens and their elected representatives have received regarding the critical and complex energy policy decisions facing our state.”

    If that’s really GPACE’s goal, Mr. Allegrucci didn’t advance it in this piece. That’s because he promotes the benefits of spending on wind energy without considering the true cost of wind energy. Further, he ignores the tremendous subsidy poured into wind energy production.

    Last year the Texas Public Policy Foundation released a report titled Texas Wind Energy: Past, Present, and Future. This report contains information about the realities of wind power. It provides the balance that GPACE says it seeks to provide but fails to deliver in Mr. Allegrucci’s op-ed.

    For example, did you know that every bit of wind power that’s produced receives a subsidy? Last year, as the subsidy was about to expire, wind power advocates warned that without the subsidy, wind power production would cease. No new plants would be built. It’s these subsidies that have created the growth in Nolan County that Allegrucci writes about. These subsidies produce some peculiar incentives. From page 25 of TPPF’s report:

    The financial handouts available to wind developers are so generous that, in Texas, many wind-energy producers “will offer wind power at no cost or even pay to have their electricity moved on the grid, a response commonly referred to as ‘negative pricing.’ Wind providers have an incentive to sell power even at negative prices because they still receive the federal production tax (PTC) credit and renewable energy credits.”

    Directing subsidies of any type into a concentrated area produces the results described by Allegrucci in this county. There’s nothing remarkable about that. But what about the rest of Texas? From the executive summary of the TPPF report:

    The distinction between wind and wind energy is critical. The wind itself is free, but wind energy is anything but. Cost estimates for wind-energy generation typically include only turbine construction and maintenance. Left out are many of wind energy’s costs — transmission, grid connection and management, and backup generation — that ultimately will be borne by Texas’ electric ratepayers. Direct subsidies, tax breaks, and increased production and ancillary costs associated with wind energy could cost Texas more than $4 billion per year and at least $60 billion through 2025.

    It’s a common error, assuming that since no one owns the wind, wind power is free once the turbines are built. That’s far from the case, though. Page 23 tells us this:

    The true cost of electricity from wind is much higher than wind advocates admit. Wind energy advocates ignore key elements of the true cost of electricity from wind, including: (i) The cost of tax breaks and subsidies which shift tax burden and costs from “wind farm” owners to ordinary taxpayers and electricity customers. (ii) The cost of providing backup power to balance the intermittent and volatile output from wind turbines. (iii) The full, true cost of transmitting electricity from “wind farms” to electricity customers and the extra burden on grid management.

    The reality is that the boom in Nolan County is being paid for by electricity customers throughout Texas. Not by their choice, too.

    When considering wind power, balance requires us to consider these factors. The illustration that a concentrated area experiences a boom from a subsidized, expensive, and unreliable source of power doesn’t paint a picture of sound public policy.

  • Minimum Wage: Helpful? Or Not?

    What’s one of the barriers to advancement by minorities in the workplace? We’re told that the minimum wage law is a guarantee that workers will not be exploited by greedy employers. But does it really work that way? Art Carden writes this in his article The Minimum Wage, Discrimination, and Inequality:

    Milton Friedman openly argued that minimum-wage laws are racist in effect if not intent; in the early 1960s, he pointed out that, as a result of higher minimum wages, black teenage unemployment was much higher than it would otherwise be. Denied the opportunity to earn incomes and to acquire valuable skills, those adversely affected by the minimum wage were not allowed to share in the general prosperity that a market economy produces. Empirical evidence reported by economists David Neumark and William Wascher suggests that among the long-run effects of minimum wages are lower degrees of educational attainment, less on-the-job training, and lower lifetime earnings.

    Minimum wage laws are one of the many examples of how well-intentioned policies meant to help people actually hurt them.

    More coverage of this issue on the Voice For Liberty in Wichita may be found in these articles:
    Unintended But Foreseeable Harms of the Minimum Wage
    Problem of Low Wages Not Easily Solved
    The Descent of The Good Column
    In Central-Northeast Wichita, Government is Cause of Problem, Not Solution

  • Leave the New Deal in the history books

    Saturday’s Wall Street Journal contains an editorial (Leave the New Deal in the History Books) that contains a summary of the effect of the New Deal:

    President Roosevelt came to office much as Barack Obama will, shouldering an economic crisis that began under his predecessor. In 1933, Roosevelt’s first year, unemployment hit nearly 25%, as people lost jobs and homes in towns across the country. Believing that government played a key role in restarting growth, FDR, within his first 100 days as president, created an alphabet soup of new agencies that mandated actions or controlled public spending and impacted private capital flow within the U.S. economy.

    At first, it seemed to be working. After four years of FDR’s policies, joblessness declined to 14.3% — still very high but heading in the right direction. Then things turned for worse again: By the fall of 1937, the U.S. entered a secondary depression and unemployment began to rise, reaching 19% in 1938.

    By 1939 Roosevelt’s own Treasury secretary, Henry Morgenthau, had realized that the New Deal economic policies had failed. “We have tried spending money,” Morgenthau wrote in his diary. “We are spending more than we have ever spent before and it does not work. … After eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot!”

    Mark Levey, the author of this editorial, argues that New Deal spending programs and higher taxes prolonged the Great Depression. Government “work” programs don’t work.

    What should we do? Mr. Levey says: “The quickest way to strengthen the credit system and begin the end of this crisis is to get money into the economy for true job creation, and not into government work programs. The way to do this is to slash taxes. … Capital flows would be in the hands of those who are driven to build businesses and permanent jobs efficiently instead of pushing that capital through a government pipeline with endless amounts of friction.”

  • Barack Obama and the Price of Change

    The Competitive Enterprise Institute, an important organization dedicated to advancing the principles of free enterprise and limited government, has a short (one minute) video that does a little arithmetic and arrives at the price of President-elect Obama’s plans for economic stimulus. Hint: it’s a pretty big number.

  • The bailout reader

    The events taking place in the financial market offer an illustration of the soundness of the Austrian theory of money, banking, and credit cycles, and Mises.org, which has long warned of precisely the scenario playing itself out today, is your source not only for analysis of these events but also the economic theory that helps explain what is happening and what to do about it. There are many thousands of articles available, and also the full text of thousands of books as well as journal articles.

    The Bailout Reader at the Ludwig von Mises Institute continues to be the best place to learn about the economics behind the current crisis.

  • Big Government Is Not Stimulus

    From the Center for Freedom and Prosperity Foundation.

    In less than four minutes, Dan Mitchell of the Cato Institute reviews the theory and history of Keynesian policies, and demonstrates that more government spending does not spur economic growth. The video is very timely since government spending has increased dramatically under Bush and now Obama wants to add another $800-billion plus of debt to finance even more spending.

    A longer version is available by clicking here.