Fundamental Astuteness

The Essence of Astuteness: Non-Partisan Intellectual Honesty

Scholarly Skepticism on Stimulus Senselessness, part 1: Causality

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MoneyAs the economy’s signs of turbulence worsened at the turn of the year, Politicians were quick to react. Not all the reactions were unified, but react they did. Almost everyone was quick to promise “swift” or decisive” “action”. I think I even heard democrats briefly mention that taxes might need to be cut. Too bad Republicans didn’t harp on that idea more.  

Nevertheless, both sides of the aisle quickly agreed that money needed to be injected into the economy. Even democrats agreed to this. If politicians can agree that more money in the economy makes it grow, I wonder why anyone would oppose a tax cut. Indeed, how is it possible that democrats and some republicans can vote for higher taxes, while at the same time indirectly admitting that more money in the economy is better by voting to put money into the economy through a stimulus package? Astuteness, anyone? 

It amazes me that politicians are rushing to give back to American’s their hard earned taxpayer dollars; yet, these same politicians don’t seem to be the least embarrassed that they took the money from Americans in the first place.  

Although more money in the economy by virtue of lower taxes is good, the government’s decision to stimulate the economy with (up to) $1200 handouts is based on…well, imagination. And that’s about it. Historically, logically, and economically, the stimulus package is a joke on political economics. I’ve read and thought quite a bit on the issue, and the foremost arguments are provided below.   

Causality—Does a reduction in consumer spending necessarily cause a recession? 

Central to the justification for passing the stimulus package was the despair over the drop in consumer spending. Politicians would have us believe that because we average people spend less, then the economy goes down because business aren’t making as much money. If businesses aren’t making as much money, then they can’t afford to hire as many employees. Then employment drops. When employment drops, more people apply for government benefits. That drains the government coffers…and the vicious cycle goes on.  

Problem is, we don’t know if the drop in consumer spending was the cause of the vicious cycle. At least once historically, this has not been the case, as explained by Alan Reynolds, Senior Fellow at the Cato Institute and author of the book Income and Wealth. He explained January article titled “Bush’s Stimulus Flop” that:  

“The economy was in recession from March 2001 to November 2001, but consumer spending fell in only the first and last of those months, plus September. Real consumption last November was still 3% higher than a year before — not much below the post-1960 average increase of 3.6%” 

So we don’t know if a drop in consumer spending causes the economy to drop. But the politicians tell us that more consumer spending is the answer anyway. Which brings us to another question…

Next on Fundamental Astuteness: Scholarly Skepticism on Stimulus Senselessness, part 2—Will the money be spent on consuming?

To be continued…

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Written by Astuteness

February 20, 2008 at 3:50 pm

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