Is All Spending Created Equal?

by Mario Rizzo

“And government spending is as good as anybody else’s.”  Brad DeLong seems to think so. But the idea is only plausible because it has been repeated many times and because it is a politically convenient “truth.”

I think everyone would agree that we have a complex economy. There is a vast and intricate division of labor, specialization of industry, and interdependencies of a high order. But there is more. The division of labor is supplemented by a social division of knowledge and its corresponding “division of capital.” Capital is not a homogeneous mass nor is investment simply homogeneous addition to that mass. Specific capital goods are arranged in complementary groupings. These are constantly undergoing changes in response to local conditions. Under extraordinary circumstances, however, when the direction of production has been distorted by excessively low interest rate policies over several years, there are many capital groupings within industries and across industries that are inappropriate.

So when DeLong, among others, says that government spending is as good as private in restoring employment, he is speaking against the whole thrust of the principle of efficient resource allocation. The essence of our recessionary problem is not the fall in aggregate demand and the lack of business confidence that accompanies it. First, it is the misallocation of resources produced by excessive risk-taking and by excessive expansion of interest-sensitive sectors. (These were generated by excessively low interest rates over the past several years.) Second, it is the uncertainty that is natural to the discovery of more appropriate combinations of resources. Third, it is the endogenous uncertainty created by the fits and starts of stimulus, bailout and unclear monetary policies.

When government adds to investment as a result of fiscal stimulus or directed monetary expansion (like buying mortgage-backed securities, student loans, etc) it does not act as a super-entrepreneur who is trying to determine the efficient and sustainable direction of resources, including the allocation of capital goods. It spends according to economically irrelevant criteria of job creation, propping up over-expanded sectors, and preventing politically painful adjustments.

Such spending is counterproductive in the medium to long term. It is also unsustainable (once the stimulus stops) since it is not consistent with the preferences of consumers-savers-investors.

These considerations tell us that government spending isn’t equally as good as private. To argue otherwise, I suggest, is a mark of basic economic error.

52 thoughts on “Is All Spending Created Equal?

  1. Guys: when you write that the government “spends according to… criteria of job creation,” that is my point. As far as creating employment is concerned, the government’s money is as good as anybody else’s.

    Since you grant my point, you can only claim that I am telling “poitically convenient” untruths by ripping what I wrote out of its proper context. My point was that just as boosts to private spending (in construction in the 2000s, in high-tech investment in the 1990s, in high-end consumption in the 1980s, et cetera) boosted production and employment, so boosts to government spending over the next several years are likely to boost production and employment and so cushion the rise in unemployment to unusually high levels that is now going on.

    Nobody is forcing you to quote me out of context. I wish you would stop. And I think it would be to your long-run benefit to stop.

  2. Wise man says, “Only a fool debates a liar.”

    Brad DeLong is a deeply dishonest man. He should be explosed as a man without character, not debated.

  3. One problem with government spending is that it isn’t doesn’t generate any tax revenue to pay down the debt. At some point, you have to move people off of tax funded payrolls, or we’ll never have a surplus again. If you want to spend government money, start building chip fabs- factories. VC fund 10 new car companies for 25B.

  4. Wow. Has the distinction between a focus on meaningless aggregates and actually understanding how economies really behave at the micro level ever been more clear? DeLong’s snip of “economically irrelevant” gives away the whole game. He really does want to dig holes and fill them up again, with no concern whatsoever about the allocation of resources and whether such activities add to human wealth.

    You’re right Mario, Keynes was a way better economist than these guys.

  5. Debate? Heck, simply by not removing his post you’ve already shown more respect for him and for intellectual discourse than DeLong gives critics on his own blog.

  6. Brad,

    I have no desire to quote you out of context. We have plenty to disagree about honestly and genuinely — without creating artificial diasagreements. I did say:

    “So when DeLong, among others, says that government spending is as good as private in *restoring employment*…” (emphasis added) I thought I was making the point clear. I also provided the link so readers could see for themselves.

    What I think this misunderstanding (as I think it is) is due to is theoretical predispositions. When you think of “as good as” you think of aggregate employment of resources. Putting issues relating to crowding out aside for a moment, I have no doubt that government spending can create employment. However, when I think of “as good as” I think not of quantity but appropriateness of employment. So you can see why I immediately jumped to that issue.

    As to “politically convenient” I should have been more clear. I meant convenient from the point of view of rationalizing current government policies. My public choice “prejudices” put me in the frame of mind of believing that much of the stimulus spending — fiscal and directed monetary — may have a special interest component. Thus, ignoring the appropriateness of employment is a way of covering this over.

    In retrospect, perhaps I should have titled the post “Is All Employment Created Equal?”

    Thanks, Brad, for commenting. It is interesting how the unspoken can sometimes cause misunderstandings.

    Finally,the responsibility of posts on this blog rests with the signed authors. The other “guys” may or may not share my opinions.

  7. I just found out that a very large portion of the “stimulus” package Tennessee is receiving is going to shore up TennCare. My suspicion is that many or most of the states receiving these monies will do something similar; use the money to support their budgetary shortfalls for ongoing welfare programs.

    I can’t wait to see the actual numbers of permanent jobs created by all this spending.

  8. DeLong, like most modern Keynesians, has no regard for capital. He tells us as much in his comment here. He says,

    “My point was that just as boosts to private spending (in construction in the 2000s, in high-tech investment in the 1990s, in high-end consumption in the 1980s, et cetera) boosted production and employment, so boosts to government spending over the next several years are likely to boost production and employment and so cushion the rise in unemployment to unusually high levels that is now going on.”

    You see, he doesn’t have any problem with the fact that we wasted vast resources building houses we didn’t need. He doesn’t see that as the root of our current difficulties. He has no problem with overinvesting in the tech/communications industries. In his world, growth is growth.

    Mario, as you point out, there is no doubt that government spending can create jobs, just as monetary policy can create jobs. Either of those factors can affect nominal GDP and therefore, employment. Unfortunately, government bureaucrats, whether on the fiscal or monetary side, have no way of predicting what the efficient, productive investments should be (only millions of investors, i.e. the market, can work that out over time) so they have decided that it doesn’t matter. The way they see it, even if they aren’t sure what investments are the best, surely their judgement is better than waiting for the market to decide. DeLong’s problem, like every other Keynesian, is that he lacks patience; he’s only concerned with the short term. After all, as Keynes said, we’re all dead in the long run.

  9. I think we need to bring Rothbard’s criticism of government spending into the picture. In _Power and Market_ he pointed out that government bureaucrats are not investing (as in I) the savings of capitalists in search of profits; instead they are spending (as in C, consumption)
    money that has been stolen from taxpayers.
    Government spending is not done to meet consumer demands. It’s done to meet the demands of vote-seeking, pyramid-building politicians and low rent, wind pissing, net tax consuming (anything I left out?) bureaucrats.

    The Keynesian Cross equation, assuming a closed economy:

    Y = C + I + G = C + S + T

    As Corrected by Rothbard:

    Y = C + I – (G + T)

    C + I = private production

    G + T = Government depradation

    A couple of ad hominems about Mr. Ad Hominem:

    He, the fattest economist alive, once called Larry Kudlow “ugly” in his blog. That was the funniest post he’s ever made.
    He also posted an open letter calling for the sacking of John Yoo. I carry no water for Mr. Yoo, but if anyone should be sacked for malpractice, it’s none other than the fattest economist alive.
    And I were a California taxpayer, I’d be demanding my aliquot share of his California tax consumption/robbery returned to me pronto.

  10. Mario,

    You are overly generous in giving Brad the benefit of the doubt, here. I felt your post clearly distinguished raw, short-term job creation from economically efficient job creation. Anyone with an inkling of economic literacy could see that. Maybe Brad is used to talking to an audience with less than that.

    Similarly, your mention of “politically convenient” truths clearly referenced Congress’s justification for spending without regards to the the net economic consequences of that spending. There was no context-shifting going on here, except by Brad pretending that we don’t understand what you and he are really saying.

    The idea that “the unspoken can sometimes cause misunderstandings” is a kind way of dealing with a thin skin. If common-sense or basic premises can’t remain unspoken in an otherwise clear discussion, then we could never take simple steps in advancing ideas without prefatory dissertations.

  11. So if we both agree that government spending will boost employment in the short run in which employment will be distressingly low, what is your point? I take your point to be that this government spending is wasteful relative to private market demand: that private-sector demand we know will be for things that people want, while government demand has a different and more political logic.

    If that is indeed your point, that’s my point–and I was there first. As I wrote last December 18 in the *Economist*:

    “This is a bad situation. With financial-asset prices at their current low levels, the businesses that should be expanding cannot raise the money for expansion on terms that make expansion profitable, while the businesses that should be contracting are contracting rapidly. We need either a substantial increase in financial-asset prices in order to give the businesses that should be expanding the incentive to profitably expand, or we need massive increases in government spending to provide the demand the private sector is not. We would rather have the first if we have the choice—private-sector demand we know will be for things that people regard as useful, while government-sponsored stimulus programmes have a different and more political logic—but we may not have the choice…”

  12. I have read and seen professor Delong debate the issue of Keynesian stimulus for some time now. I am still waiting for him to reply to the “Austrian Capital Theory vs. Keynesian-Monetarist K” bit of the debate.

    Once one acknowledges that stimulus and monetary expansion is just backdoor central economic planning, doomed to stagnation at best, the top down side arguments fall apart.

    Is anyone aware of any papers employing agent based models, or other complex systems theory, to test these arguments via simulation? Seems to me that this could settle the debate.

  13. The proposed government spending, or so-called stimulus, is out-of-step with consumer preferences. If the industries receiving bailouts were producing in-step with consumer preferences, then they would not need the bailout! Also, most of the other spending was deemed unimportant enough to leave out of the ordinary budget–already bloated.

    If the spending stops, then we’ll be right back where we started. But, perhaps, the spending will never stop; perhaps no politician will have the will to let it stop. After all, they do have a printing press …

  14. I partly take Delong’s side. His point is that government is a part of the economic cycle, and government does, over its equilibrium cycle, obey the laws of economics. It cannot be any other way.

    DeLong gets into trouble when he moves from a scalar world of simple demand and supply to a vector world of a distribution of spending options. Because if we admit that some government spending is better than others, then we admit to the concept that some government cutbacks are inevitable if other government spending yield superior results.

    IMHO, there is in this recession a requirement that it is government’s turn to adapt, for, in my theory, there is something government is doing or not doing that results in the deflationary spiral.

  15. Mario or other of “you guys”: Do we have a glib (and ideally, truthful) response to the Keynesian complaint that there is insufficient aggregate demand to boost employment?

    I debated Dean Baker on the local San Fran NPR affiliate last week, and I don’t think I gave him a really good answer on that crucial point.

    It seems a similar thing is happening here. Believe me, I understand full well why people are hostile to DeLong (and on my own blog I’ve done my part in fanning the flames), but I could see why he could look at this post and comments and not see any challenge to his worldview.

    I think the answer is that yes, we Austrians concede that unemployment would go up, at least in the short-run, if the gov’t abandons all “stimulus” efforts. And then we explain why this is better in the long-run.

    Do “you guys” agree?

  16. Bob Murphy,

    Yes, I believe we do have a quick and truthful response to the Keynesian complaint that you cite:

    Insufficient aggregate demand for the existing array of output is a symptom of a capital stock not well coordinated with the desires of the public. When private entrepreneurs invest in a new capital stock better coordinated with the desires of the public, that will lead to sustainable employment. Any sort of fiscal or monetary stimulus is unlikely to have any lasting benefit because it almost certainly will not correct the underlying coordination problem.

    I don’t know how persuasive it would be to argue that a short run increase in unemployment is better than the total cost of stimulus policy. The other side implicitly assumes that their marginal rate of substitution between unemployment and allocative efficiency is the right one. I wonder how large the corresponding increase in long run economic growth would have to be for Baker or DeLong to think that a 1% increase in unemployment was “worth” it.

  17. Brad DeLong,

    What you seem to suggest in your last post is that government demand is equivalent to consumer demand, and that it is an adequate substitute source for the investment that business require in order to profitably expand.

    If this is true, then you miss Mario’s key point: government demand is only politically convenient demand that has absolutely no cause to resemble long term consumer preference. This sort of demand can only produce expansion in businesses that cater to government spending, and are therefore unlikely to be profitable in the long term. Moreover, reallocation of demand from consumers to government crowds out the very businesses whose growth would lead to long term profitability.

    The problem is not fundamentally a drop in aggregate demand — though that does play a role — it is the misallocation of capital into non-sustainable enterprise, which, incidentally, is exactly what led to the mortgage and home construction bubble.

    Nobody disagrees that forced spending by government will create demand for the goods government tends to purchase (lots of paper, ink, and consultants I suppose), but merely that these are not things that are profitable once the stimulus stops.

    Happy to respond here since you so kindly removed my posts from your own blog.

  18. Does government spending really have no opportunity cost right now? That seems to be the implicit or explicit assumption by the Keynesians. Any suggestion to the contrary will get you labeled as a “wingnut”

  19. Brad,

    We seem to agree that beneath the aggregates there is a resource allocation problem. Certain industries need to expand while others need to contract. I believe that those that need to contract are relatively interest-rate sensitive areas, those that involved high-risk investments, and some long-term sectoral problem areas like the American auto industry.

    It is important that targeted stimulus (both fiscal and monetary) does not significantly inhibit the re-allocation of resources. Unfortunately, the poltical principle of resource allocation differs from the economic principle. Much of what government, including the Fed, is trying to do will have the effect of slowing down necessary adjustments. This is bad.

    Now I fully understand that once a recession gets underway that “the dark forces of time and ignorance” may contaminate all sorts of investment projects including those that will ultimately be justified. This is bad, but no one has the knowledge to know in specific terms, now in the midst of the “confusion,” the difference between wheat and chaff. Yet a discovery process will occur to the extent that the system in not burdened with “regime uncertainty” and obstacles to efficient resource re-allocation.

    A few months ago I gave a talk in DC at a Heritage-Club for Growth conference. There I said that one of the virtues of the (marginal) tax reduction approach to stimulus is that the stimulus is directed where consumer-investors want it to go. Thus, it is more likely to generate sustainable lines of output.

    Whatever is done, there will be pain. Stimulus that actively prevents or inhibits market adjustments does not solve the underlying problem. Whenever large quantities of resources move from one area to another there is pain.

    Part of reducing the potential for pain is to prevent deflation. Deflation would distort price signals just inflation distorts price signals. There is no need to compound our problems by permitting deflation.

    In the recent past the distortion of price signals took the form of excessively low interest rates. The misdirection of resources caused by this is not cured by preventing necessary adjustments.

  20. I’d also like to add that I appreciate all the interest people have taken in this post. Let’s keep the discussion to the economic issues. Ad hominem attacks are unnecessary and counterproductive.

  21. “I think the answer is that yes, we Austrians concede that unemployment would go up, at least in the short-run, if the gov’t abandons all “stimulus” efforts. And then we explain why this is better in the long-run.”

    The situation would be better (even from DeLong’s viewpoint) if the govt didn’t produce make-work jobs to lower unemployment, but just handed checks to people to sit at home. At least at home, people aren’t wasting other resources on government projects, government jobs aren’t being created to hang around forever stinking up the place, and everyone would know that the people receiving the checks are doing nothing of value (instead of in the make-work case where they are unsure.)

  22. DeLong quotes Rizzo out of context — while falsely complaining about “being quoted out of context”.

    This reflects a long standing issue with DeLong’s style dialogue.

    It’s absurd not to talk about the elephant in the room.

    If two people are discussing and issue, and one of those people is patently not a true seeker, you’ve got a problem, and you best be open about it.

  23. One of the functions of prices is to prevent resource re-allocation. When prices are higher than what another is willing to pay, resources are not re-allocated. Transactions may be halted because resources are more valued in the prevailing allocation than any alternative.

    In other words, for each individual, prosperity is had from an optimal rate of spending, and to exceed it would be impoverishing. Undermining the ability of prices to prevent transactions is as destructive as undermining their ability to allow transactions.

    Even if we knew what aggregate rate of spending would emerge when the optmial rate of spending is satisfied for each individual, successfully targetting that aggregate would not necessarily translate into individual prosperity (e.g. 5 + 5 = 10 = 8 + 2). Nobody knows what the correct aggregate rate of spending should be, and even if they did, prosperity is a function of satisfying individual optimals, not ambiguous aggregates.

    The fiscal and monetary stimulus is about undermining the ability of prices to prevent transactions. It is about fooling market actors into hiring more workers and buying more goods than they otherwise would. It is about making stupid decisions seem smart by fooling with prices.

  24. Mario,

    “…one of the virtues of the (marginal) tax reduction approach to stimulus is that the stimulus is directed where consumer-investors want it to go.”

    Very good point. And it occurs to me that what a great many “consumers” want to do right now is pay off debt, that is, to pay to eliminate the worries brought on by excessive debt. Perhaps this explains much of the concern with the government running up debt in our name.

  25. I think US government spending would be good if they would spend it on me. Just deposit the money in my bank account. I’ll get it ‘multiplying’ into the economy ASAP. Does $1B per day sound about right, or should we make it $3B (I’m not sure how much stimulus they think is needed, either way is fine with me).

  26. DeLong makes the nuanced point that we technically agree with him, this will slightly increase the number of jobs, while ignoring the usefulness and pay of those jobs opens of the door to ask: “Why not just eliminate the minimum wage?”

    I’m sure most companies can find something worthwhile to do at 2 dollars an hour.

  27. It seems to me that government spending for the purpose of creating or maintaining employment amounts to make-work as a covert form of redistribution.

    This is not to say that any of the production stimulated thereby is not worthwhile, but that, if we were able to actually compare them, government spending cannot effectively replace consumer spending.

  28. Apologies! Sandy Ikeda informed me that I forgot to sign this post initially. So it was reasonable for Brad DeLong to think that it may have been a group post. I have corrected this now. How awkward.

  29. Mario

    Excellent Post! You should remove all comments by Brad DeLong. He is such an insecure liar that he deletes all dissenting comments on his blog, even the drippingly polite ones. He is a loser.

  30. “The essence of our recessionary problem is not the fall in aggregate demand and the lack of business confidence that accompanies it. First, it is the misallocation of resources produced by excessive risk-taking and by excessive expansion of interest-sensitive sectors.”

    I don’t think this is right. Stagnant wages and negative savings rates and increasing personal debt would have resulted in a recessions ( of inadequate aggregate demand). There was no misallocation of resources as the “resources” where crap pieces of paper with no value anyway that simply delayed the inevitable recession… again do to stagnant wages and the resulting decrease in aggregate demand.

    Same pattern we saw in 1929 after deregulating that economy and shifting all the income to a small number on top. What are we gonna have to do this a third time before people see the causality?

  31. That government stimulus spending is not valued as highly as personal spending is beyond doubt. Each individual’s preferences are arranged ordinally. Government’s usurpation of one’s purchasing power lowers one’s anticipated benefit. At my Intro to Austrian Econ class at the U. of IA, I demonstrate the effect with this formula:

    ((C + I) – G) + .8G = GNP

    C = Consumption
    I = Investment
    G = Government Spending

    The formula demonstrates that government must obtain each dollar that that it spends by robbing the private sector, represented by Consumption plus Investment. Then it adds back something less. One may quibble with whether government wastes 20% or something greater, but one may not argue that government spending delivers the same anticipated benefit as the combination of private consumption and investment. As the formula demonstrates, the more government spends the LOWER becomes GNP. If Mr. DeLong were correct, then we all should be perfectly comfortable giving ALL of our income to government. I believe this experiment was tried in the Soviet Union and the results were not as anticipated.

  32. It’s been alluded to here, but it’s important to note that Brad DeLong may be a good economist but is also quite partisan and mean spirited. It’s fine to be partisan, but it tends to be accompanied by a reduction in objectivity.

    Re: his comment at 1:31 pm, so he’s agreeing that ‘government spending is not as good as anybody else’s.” To claim “that’s my point” is shameful.

  33. Pat Barron makes an excellent point which can never be made enough times – the State considers its spending a contribution to the total output of the economy, when it is in fact the very opposite.

    As I see it, it is possible there may be such a thing as a multiplier – but only technically, because it can never be more than 1 (i.e. once the dollar has left the government, it cannot possibly be “spent more times” than any dollar that left the account of a private investor. I mean, the government’s dollar does not come with a homing device to auto-detect its highest “velocity” route through the time structure of the economy. So the multiplier cannot possibly be higher than 1. There are, of course, many reasons why it must be less than 1.

    I have been trying to think about this, and the best I can come up with is some kind of marginal utility effect with government spent dollars. The first few dollars the government spends in the economy will perhaps have a multiplier of approaching 1, but as more and more of the economy is commanded by the State, each succeeding dollar spent has a lower and lower multiplier (which I suppose tends towards 0, when the government directs 100% the entire economy, at which point a society can live only off of its accumulated capital stock – so therefore the multiplier must have a time dimension just like investment – i.e. given enough time, a Communist state with no ‘black market’ will actually produce literally nothing whatsoever).

    It is not possible for government to spend money in such way as to garner more follow-on spending. This is not economics, which deals with the management of scarce resources; but ideology plain and simple.

  34. Good thread! I was lead here by a reference at Cafe Hayek by Don Boudreaux. Thanks, Don! I especially liked Lee Kelly’s comment:

    “Nobody knows what the correct aggregate rate of spending should be, and even if they did, prosperity is a function of satisfying INDIVIDUAL optimals, not ambiguous aggregates.” And Also:

    “The fiscal and monetary stimulus is about undermining the ability of prices to prevent transactions. It is about fooling market actors into hiring more workers and buying more goods than they otherwise would. It is about making stupid decisions seem smart by fooling with prices.”

    This is my first time on this blog, but it won’t be the last for this Austrian Libertarian.

  35. Leroy Madden,

    You’ve been missing out. I strongly recommend you go back over the archives for the last year and read Dr. Rizzo’s contributions.

  36. Why create jobs? The economic problem is scarcity, i.e., too many jobs. If economists would avoid the newspaper terminology of job creation, for the more accurate terminology of employment creation, then it is much more difficult to ignore the allocation issue when discussing “macro” issues. Creating employment can not be seperated from the issue allocation, and makes much more difficult the easy division between macro and micro issues that some engage in.

  37. Muirgeo,

    If something you read doesn’t seem right don’t be so quick to discount the possibility that you’ve misunderstood. Otherwise you risk giving the impression that you are being deliberately obtuse in an effort to preserve your worldview.

    When people claim that recessions are caused by misallocated resources, they mean real resources. Your false assumption that deregulation and inequality caused the recession might have led you astray as well. Recall that this recession is a global one affecting countries with a wide variety of regulatory systems and redistributive policies.

  38. “When people claim that recessions are caused by misallocated resources, they mean real resources.”

    So what were the real resources that were mis-allocated? And where should they have been allocated to?

    Oh and who controlled these resources?

    If these questions can not be answered it was likely not a misunderstanding on my part but a mis-statement on those proclaiming certain things as facts.

  39. muirgeo asked, “So what were the real resources that were mis-allocated?”

    Factors of production–land, labor, capital, etc.

    “And where should they have been allocated to?”

    They should have been allocated to whatever combination of uses would have been most highly-valued. No one can know what that might have been, and no one can know what it might be in the future. It can only be revealed by entrepreneurial trial and error, with consumers providing feedback through the prices they are willing to pay on the market.

    We can say that if there has been widespread investment in ventures that people are not willing to pay the cost of sustaining (e.g. in the building trades), then we have widespread misallocation of resources.

    “Oh and who controlled these resources?”

    Lots of different people. In the market, consumers influence resource use by how much they choose to spend and what they choose to spend their money on. Governments influence the use of resources by taking things and threatening people.

  40. So would it makes sense now for the federal government to hire people to break windows in the interest of stimulating aggregate demand? Perhaps targeted in California, Nevada, Arizona, and Florida where the current crisis is most acute? Just to get through the tough times . . .

  41. Particular price coordination is not solved by general price inflation aka money ‘injection’ or fiscal ‘stimulus’. Those that take on new workers with their newly printed purchasing power may prosper for a while but those down the line see their money’s purchasing power eroded as prices rise. Aggregate demand is but another name for outputs in general and true demand for a firm’s produce is the output of all non-rival firms. See the work of W H Hutt on this. Spending is a mere consequence of pricing – if the product and prices (including wages) are right. Increasing customer valued output is to increase demand. More money, spent on make-work schemes and bailouts, simply means increased prices.

  42. Ah, George (muirgeo) has migrated from Cafe Hayek.

    Watch as he resurrects his zombie straw men which have been slain so often.

    He’s a top down kind of guy.

  43. Muirgeo claims:

    “Stagnant wages and negative savings rates and increasing personal debt would have resulted in a recessions [sic]”

    Sam Grove is 100% correct about Muirgeo’s point of view being top down. Also about his straw man arguments, such as the ‘stagnant wages’ claim. Alan Reynolds has taken down that specious argument; an honest and statistically valid analysis of the data show no such stagnation. There are those who refuse to let a few facts get in the way of an emotionally satisfying argument.

  44. How about putting it thusly:

    Government spending is better than anyone else’s at creating faux jobs, because no one else is as able to afford such stupidity.

  45. If significant malinvestment has occured in interest rate sensitive markets, and those markets have subsequently resized to something like their long-term trend levels, then resources (land, labor, capital, IP etc) have been freed up, and can therefore be re-employed profitably in other industries.

    Now it would seem that implicitly, the Keynesians believe that this period of reinvestment need incur no lag ‘penalty’, or temporary period of underemployment of resources. The transition from overinvested industries to otherwise can be, with enough help from the government, seemless. This is surely a debatable point.

    Also, it must be recognised that the original malinvestment came from cheap money – below natural rate interest rates. Now where will the money come from for reinvestment? More cheap money? If yes then why not presume more malinvestment, regardless of the source of that investment? If alternatively it is to be financed by savings, then how is this supposed to occur if the goverment diverts savings into bonds, and spends the proceeds? Where will the money come from? It is not clear to me at all that a period of underemployment is avoidable, to the point where only an increase in fricitional unemployment is necessary.

    Standard Keynesian macro is undone, in my opinion, by its attempt to model economic aggregates with only a very weak micro, meso and time conceptualization, simply on the basis that ‘something’ is better than ‘nothing’. Surely this is not adequete.

    Sorry a bit late on this thread.

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