Have you ever read our blog the Irish Liberty Forum? It’s probably the foremost Austrian economics site on the Island.

What do you mean by “proper stimulus”? We already have economists claiming that the US and EU stimuli will not work becuase they “are not large enough”. As I said before, this is an excellent way not to have to reconsider your belief in Keynesianism.

And second of all, a recession ends when all the bad investments of the boom are liquidated and wages fall enough to re-employ the unemployed. So whereever Keynes and his ilk describe an “underempoyment equililibrium” they are talking nonsense. Clearly there is a massive disequilibrium where some wage or price isn’t allowed to adjust.

Just like no man ever spent his way to a fortune, no country will find the path to riches this way either.

Schiff was adamant that decoupling would save the world economy, but was wrong. Roubini seems to be the most prominent name that was right about everything http://en.wikipedia.org/wiki/Nouriel_Roubini#Recent_predictions

Anyway, returning to your allegation about deadweight losses. Unemployed people scratching their ass all day is a deadweight loss. If you employ some of them to dig a hole, they will employ a few others when they spend the money.

All these cliches only apply to a booming economy in full employment. In a depression, it’s almost impossible for proper stimulus to fail.

http://www.youtube.com/watch?v=2I0QN-FYkpw

The savings may have come to the US from China but the Fed did not put any brakes on the increase in the money supply, and when combined with perverse incentives, the results were predictable.

Also this idea that giving someone money to dig a hole (and fill it back in again) represents a useful (or profitable) way to stimulate the economy seems to be taking things too far. Why don’t we give each person a million dollars and all become millionaires!!

The waste and pork in the stimulus represent a real deadweight loss and one which people will end up paying for through higher taxes and, no doubt, inflation.

Peter Schiff again on CNN World - 1st Feb 2009

http://www.youtube.com/watch?v=7xCjhec5ygo

Contrary to what the figures tell you there was no “wartime boom” nor a massive crash after it. Robert Higgs has done a lot of work into the economics of war. Surprisingly, it turns out war’s bad for the economy.

The economy got out of the recession once the price and wage controls were eliminated in 1946, and the uncertainty of the Roosevelt regime was put to rest.

Yes, because it represented a suitably massive fiscal stimulus/public works programme.

In a similar vein he has also argued that the Japanese recession lasted so long not because the government was subsidising unprofitable firms, but rather they did not spend *enough* money. 100 trillion yen is not serious money for Krugman.

Krugman, and Alan Matthews above are already covering their tracks, claiming that the action being taken is not aggressive enough. How can you argue for something that can’t be proven? I guess that takes a bit of faith.

The so-called consensus in the US in favour of the proposed stimulus is receiving more and more criticism

http://www.realclearpolitics.com/articles/2009/02/investing_in_what_doesnt_work.html

http://www.ft.com/cms/s/a861325c-f394-11dd-9c4b-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fa861325c-f394-11dd-9c4b-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fcomment%2Fopinion

http://www.usnews.com/blogs/capital-commerce/2009/01/27/10-reasons-to-nix-the-stimulus-plan.html

http://www.usnews.com/blogs/capital-commerce/2009/01/27/10-reasons-to-nix-the-stimulus-plan.html

What about the Mises school of thought, the government (the Fed) got us in to this mess so they shouldn’t be the ones trying to fix the problem. It’s largely a crisis of capital so cut taxes.

The ‘cost’ of the stimulus is in turn set by the market. Bond yields are still pretty low right now, because money just isn’t very productive at the moment. But that doesn’t matter - what matters is that the yields are high relative to what private investments are paying out. That’s bad news, because it is these private investments that will create the recovery.

What’s wrong with Krugman’s piece in the IHT is that it fails to take account of the fact that the monetary economy is broken. But the solution to a broken monetary economy is not fiscal - that’s just like pouring oil into an engine that’s blown a gasket. And the Fed’s Interest rate tool is a bit like a clutch pedal with a broken clutch cable - you can press it as much as you like, but that won’t get you into gear.

So I am just going to stay out on my limb and contradict this consensus: These stimuli are a bad idea and they will hurt, not aid, the recovery, unless governments start spending the money in a much better way than they are doing at present.

That would mean getting back to supply-side basics: Identify market failures (externalities, myopia, informational asymmetry, imperfect competition) and correct for them. Saving General Motors is also like pouring oil into an engine that’s blown a gasket - in more ways than one!

Clearly, the main constraint on using fiscal policy in the current crisis is the threat of long-term fiscal unsustainability, particularly in countries where ageing and rising health care costs will add to fiscal burdens in any case. Thus, it is clear that some countries are in a better position to launch a fiscal stimulus than others, and yet others, such as Ireland, had carried out such an extremely pro-cyclical policy in recent years that they don’t even have this option. Buiter’s blog post that John draws attention to above is also sceptical than fiscal policy in the US and UK will work because of the lack of a credible exit strategy in these countries - whether he is correct in this assessment or not I don’t know - but he is fully supportive of fiscal stimulus in countries with fiscal credibility.

It was in this context that I asked if people think that the EU as a group is doing enough or could be doing more?

I think the consensus may have been that fiscal policy was inferior to monetary policy?

This famous ‘consensus among economists’ is a strange beast. It’s like the ‘consensus’ amount ‘right thinking scientists’ that global warming isn’t man made

Seriously though, this shouldn’t be seen as a political or ideological argument; we have to look at the evidence of history. Decades of real world experience show that multipliers exist and that Keynes was essentially right. Full employment, and growing output, reigned from WWII up to the 80s, and unemployed soared (with falling output, if you discount the North Sea oil) under Thatcher because she, unlike Reagan, ditched Keynesian policies. And deflation, not inflation, is the threat now so even monetarists have to see the benefit of fiscal stimulus now.

Multipliers aren’t some weird financial theory - they are rooted in the real world of real people doing work. Give an unemployed man some money and he will spend it. A chain of previously unemployed people will be formed, each doing work they wouldn’t otherwise have done. So the government could spend $20 and $100 dollars of work could be done. Hence a growing economy rushes into surplus and we are all grateful for the stimulus because it meant that the debt burden actually decreases in the long term.

I’m unconvinced by this argument. If the government employs a man to dig a hole and fill it in, the deadweight loss to the economy is the productive labour which the man did not engage in during that time - in other words, the opportunity cost of the income paid to him. You may say that the economy is somehow failing to provide him with that alternative productive labour, and there may be a role for the government to help there, but the answer is certainly not in assigning him busywork.

In mathematical terms, multipliers have to be normalised intertemporally and across all production vectors in the economy; only then will they take account of deadweight loss. In other words, the promise of a multiplier of, say, 1.5 isn’t a justification for a fiscal intervention if it comes at the expense of a private sector investment which has a multiplier of 1.6.

Anyway, my issue was not really with labour, but with capital. What I think stimulus is about is forcing high returns on intrinsically worthless investments, thus making it hard for investment with real value to compete. We are a long way from the kind of prosperity that will allow us to idly dig holes all day.

With high unemployment, the famous multiplier kicks in. Even if the government employs people to dig holes in and fill them in, the knock effect in the private sector will be larger; and most of those consumption and investment decisions will be made by private individuals according to the usual motives. So the productive work that is done will outweigh any small amount of potentially unproductive work directed by the state.

Can we have a thread here to sort out, once and for all, the debate over multipliers being greater than 1? And to prove that, during periods high unemployment, almost any stimulus programme will work (to the benefit of everybody) as long as the government directly purchases goods and services.

The first effect will be to drive up the cost of public borrowing to a point where the private sector will be largely crowded out. Then, “crowding in” can only occur if the stimulus money is well spent - ie to support nascent industries with high long-term growth potential.

So far, we have only seen evidence that the opposite is happening. By recapitalising failed banks, the governments are in effect propping up the bad investment decisions which got the banks in hot water in the first place.

The rest of the money looks like it will be spent on sectors of the economy with low growth potential but vocal and trusted unions that can exert political pressure on the governments controlling the pursestrings. Peugot PSA and GM somehow come to mind…

Propping up monoliths and their failed financiers is bad enough, but doing so at the expense of innovation is a cocktail certain to be fatal for any future growth.

http://blogs.ft.com/maverecon/2009/02/fiscal-expansions-in-submerging-markets-the-case-of-the-usa-and-the-uk/#more-428

On the underlying growth potential of the economy: we must be concerned that the property boom masked a significant deterioration in the underlying trend. We can’t forget about the competitiveness/productivity agenda even as we struggle with crisis management.