Monday, February 2, 2009


"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 that 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. ... 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 requring a cut in anyone's consumption or investment. ... If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. ... Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases. Where's the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market as marshalling idle resources to produce useful stuff. Unemployed labor and capital can be utlized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system. ... A much more plausible starting point is a multiplier of zero. ... This approach is the one ususally applied to cost-benefit analyses of public projects. ... I have estimated that World War II raised U.S. defense expenditures by $540 billion (1996 dollars) per year at the peak in 1943-44, amounting to 44% of real GDP. I also estimated that the war raised real GDP by $430 billion per year in 1943-44. Thus the multiplier was 0.8 (430/540). ... There are reasons to believe that the war-based multiplier of 0.8 substantially overstates the multiplier that applies to peacetime government purchases", Robert Barro (RB) at the WSJ, 22 January 2009.

RB is a Harvard economics professor. I agree with RB. See my 19 October 2008 and 4 January 2009 posts:


Printfaster said...

I will tell you where the flaw is: The outstanding debt cannot be paid with the available currency in circulation.

This insidious process where the government issues more debt than currency assures the public that the debt will never be paid. It is a treadmill for the citizens.

It should be a law that no more debt can be issued than there is currency. As long as a currency deficit exists, the Fed will be able to create a deflationary environment.

We have not played this game to extreme. What has happened is that far too much debt has been issued, and this is horrid overhang that threatens the value of the currency. To keep the value of the currency from sinking through the floor, the fed limits the amount of currency issued. If the Fed were doing its job, it would issue enough currency to buy all the federal debt.

In the past this was done with gold in circulation. Once the government decided that it would issue more debt than gold, the games began. To keep the debt from being refused, the fed would limit the amount of currency issued to artificially hold the price of the dollar high.

Currently the dollar is overvalued because the debt in circulation has not been recognized.

As far as I am concerned, the Keynsians are Ponzi artists, issuing debt that they full well know can never be paid back, all in order to stimulate the economy. That economy is a fake economy because it is built on the sand of debt.

Printfaster said...

I wanted to add a slightly more obvious model of what is going on.

Think of a company issuing both stock and convertible debentures. Imagine that the converts are for more stock than is outstanding.

While the converts are issued, those owning them can naked short the stock, because they are backed by the converts.

Unless the company issues more stock before conversion takes hold, there will come a massive short squeeze when the owners of the converts try to buy the stock that does not exist, to close their short sale.

Anonymous said...

OK IA... you are on to something here but I'm not sure you've got the right components to mix and match yet...

Independent Accountant said...

I disagree with you. Why? Because you confuse money with debt. They are not the same. Suppose you borrow money to buy a car. You get hit by a car and are killed. The car is destroyed. The amount of money in the system does not change. Only the debt, which is claims to receive or pay money in the future changes. This is clearer under a 100% gold standard. The amount of gold is fixed. The amount of future claims to receive or pay gold is not. Go to the website Accounting Onion for the "Largest Possible Entity" Concept. The receivables and payables all net out. The gold does not.

Printfaster said...

Don't think that we disagree that much. I have come around to realize that while US debt is handled as money, it is still debt.

Look at the example of the convertible debenture. There debt in the form of debentures promises payment in stock. If there is not enough stock around, there will come a short squeeze as payment is played out.

It is the rollup of US debt currently that is creating a short squeeze on the dollar. There is a bigger one looming and that is the short squeeze on federal debt payout.

What I am saying is that currency inflation is mandated in the future, and especially if US debt is refused or cashed in. Currently the shortage of dollars is distorting the its relative value to assets and other currencies.

Bottom line: There is a shortage of dollars today. In the future there will be a massive glut of dollars.

Independent Accountant said...

We are not far apart. I am not smart enough to know when the dollar will collapse. One year, two years, five years? I know I would rather own most any real asset or a claim to assets than dollars or claims to future dollars, i.e., bonds. Read the post at Accounting Onion if you haven't.

Printfaster said...

Thanks for the pointer to Selling. I like this one:

I notice that he worked for the SEC. I see that accounting and healthcare are infested by the same layers of professionalism that yields only more work for the profession and less money for the public.