Wednesday, September 07, 2011

Creating Jobs?

I admit, I do not understand how this "job creation" is supposed to work.

President Obama is apparently wanting to spend yet another $300 billion in so-called "economic stimulus". This means selling $300 billion in treasury bills - promising to pay that money back in future generations - to "stimulate the economy". Some of that money will go to buy things directly (pay some construction company to refurnish a school). Some of it will be used to cover current expenses while the government cuts revenue elsewhere (extending the payroll tax credit).

Now, let's assume that I have $2 million that I could use to buy some of those T-bills.

What would I be doing with that money if I didn't buy T-bills with it?

I see three options.

Option 1: I could spend it - renovate the house, buy a car, order Chinese food, see a movie, upgrade my computer, buy a huge home theater system, and so forth. You know - stimulate the economy. Create jobs.

Option 2: I could pay off debt. For me, this would mean that I get to blow more of my future earnings on stuff I want instead of making payments. For the bank, it means that they have $2 million that they can use on whatever they want. They could lend it to somebody wanting to start a small business, or build a house, or have a wedding, or buy a car. You know - stimulate the economy. Create jobs.

Option 3: I could put it into savings. For me, this means turning it over to a mutual fund manager. She would then use the money to make me partial owner in any number of companies that her researchers expect will make money in the future. Who knows what the previous owner wants the money for. Maybe he wants to invest in some other opportunity that is expected to make even more money? Maybe he is retired - or unemployed - and needs the money to cover expenses. Or my mutual fund advisor could use the money to buy bonds from companies that are borrowing money for some project or other. You know - stimulate the economy. Create jobs. It could buy government bonds, but what is the economic difference between buying government bonds to pay for a government project, and buying corporate bonds to pay for a corporate project?

I do not understand how this type of government program is supposed to actually improve the economy. Instead, it seems to simply change the nature of the jobs that are being created, from those that I would create with that money, to those that the government creates with that money.

The economic downturn may well be attributed to weakened demand, but what reason is there to believe that the government will be drawing it's money out of the weakened demand? As opposed to, say, diverting the flow of existing demand?

If somebody were to just drop $2 million on my lap - that is, print 100,000 $20 bills and ship them to my home (or just change the balance on my checking account by adding a 2 and a string of zeros in front of my current balance), I can see how this will stimulate the economy. But, to borrow money to stimulate the economy? How does that work?

Heck, drop $300 billion in my bank account and I will stimulate the economy. I would build a space program that would construct an orbiting factory town that builds orbiting solar power satellites and beam the energy down to earth. I don't know if it is an economically wise project, but I would employ a lot of people - a lot of intelligent people. These would be good jobs.

We would never have to pay anybody back - because the money was not borrowed. It was created out of thin air just by logging into a computer and altering the balance in my bank account. Legally, of course - as a matter of government economic policy.

We would have to deal with a bit of inflation. My space project would bid up the price of certain goods and services - from raw materials used to make and launch the rockets to the skilled labor that creates and uses both the hardware and the software. Others would have to pay the inflated (bid-up) price. That is one of the costs of this method.

But that is not the option President Obama is proposing.

Maybe it is a placebo? It is supposed to make the patient think that something is being done while nature takes care of the problem itself.

Face it, a President cannot stand in front of a group of people and say, "Sorry, there is nothing I can do," even if it is true. The next person will come along with his or her snake oil that does nothing but promises everything and get all the votes. So, every candidate needs to bottle and market their own brand of snake oil. The best snake-oil salesperson wins the election.

In this contest, the incumbent has a bit of a disadvantage - we see that his snake oil doesn't work. The other snake-oil companies can loudly point this out to us while they give us untested promises on the effects of their own snake oil.

Remember those checks we got as economic stimulus under the Bush administration?

If there were a Republican President today, he would also be giving a speech selling his own brand of snake oil, against a screaming herd of Democrats telling us that it won't work and to put a Democrat in office instead.

The only question is, do we prefer the red snake oil, or the blue snake oil?

But this snake oil has side effects. They include $300 billion in debt that future generations will be forced to pay back. Another side effect is a misplaced labor force, because once the stimulus ends the economy - including the jobs - will have to shift again. Stimulus jobs die, and people become unemployed.

But let no President or candidate ever be allowed to stand before us and say, "We are going to have to ride this out." We can't allow that.


mojo.rhythm said...

By the same token Alonzo, if Obama just folds his arms and does nothing, the economy will continue to crawl along on its stomach. Unemployment will remain at 9.1% (real unem. at ~20%), demand will stay low, businesses will continue to close, putting more people on the welfare line, and so on. As a result, the public debt will grow even larger because:

(a) revenues will dwindle due to the unusually low amount of people working and paying taxes.

(b) the deficit will grow as more people sign up for welfare

(c) newly unemployed people will lose their private health insurance, so if they get sick and are in an emergency, the cost of their trip to the hospital will come from the public coffers, further worsening the deficit.

As sad as it is, the solution required is for a freakin huge stimulus to the economy that will skyrocket demand and bring jobs back. And that unfortunately means the government needs to spend, spend, spend.

I do agree with you that the stimulus money must be invested wisely, and done in a way that results in money starting to be circulated again, rather than hoarded, but sitting on our hands and "riding it out" seems like a horrible option to me.

The problem, it seems to me, is that economics itself has become so disgustingly corrupted and bloated by ideology, that none of its commissars seem the slightest bit interested in making their pronouncements consonant with reality. As a result, Capitol Hill has become a prick-waving dick fight between different economic theologies, rather than a genuine, thoughtful discussion on the most useful policies to get the economy working again.

And that includes Krugman, Stiglitz et al. (albeit to a more limited extent), as well as nearly all the Austrians and Neoclassicals in the mainstream arena.

Doug S. said...

I do not understand how this type of government program is supposed to actually improve the economy. Instead, it seems to simply change the nature of the jobs that are being created, from those that I would create with that money, to those that the government creates with that money.

What you have described is referred to by economists as "crowding out". The claim that fiscal policy can never affect the total output of the economy is called the Treasury view, and it's generally based on reasoning similar to what you used.

Here is one criticism of the argument.

The basic situation comes down to this: people who have money aren't spending it as fast as they used to. Banks are having more trouble finding good loans to make, and other corporations are also taking longer to decide what to do with the cash they have on hand. People are currently willing to lend the government money at very low interest rates, which is another sign that they're having trouble finding other worthwhile things to do with their money. If government borrowing increases the rate at which money changes hands - which is something that it can do - that will indeed create more jobs than letting the money sit idle in bank accounts while the banks struggle to find worthwhile loans to make.