Sunday, November 09, 2008

Will Someone Please Tell Robert Reich That He Is An Idiot?

Floundering in dizzying circles at TPM, Robert Reich says:

Absent consumer spending, businesses are not going to invest.

That is his full argument, minus an authority appeal or three in the attempt at explaining basic Keynesian economics, followed by some wishful swiping at straw men.

Businesses invest because that is what they do if they have money left over after paying their bills, labor, and taxes. They invest in the expectation of making a profit.

Reich does what is his apparent best to come up with arguments against some kind of new-New-Deal-bailout-f0r-everyone, and says that there are only two such (emphasis added):

Expect two sorts of arguments against this. The first will come from fiscal hawks who claim that the government is already spending way too much. Even without a new stimulus package, next year's budget deficit could run over a trillion dollars, given the amounts to be spent bailing out Wall Street and perhaps the auto industry, and providing extended unemployment insurance and other measures to help those in direct need. The hawks will argue that the nation can't afford giant deficits, especially when baby boomers are only a few years away from retiring and claiming Social Security and Medicare.

They're wrong. Government spending that puts people back to work and invests in the future productivity of the nation is exactly what the economy needs right now. Deficit numbers themselves have no significance. The pertinent issue is how much underutilized capacity exists in the economy. When there's lots of idle capacity, deficit spending is entirely appropriate, as John Maynard Keynes taught us. Moving the economy to fuller capacity will of itself shrink future deficits.

So it's economic growth based on government spending, an economic five year plan without a specified time frame.

More pointedly, the dubious Keynesian belief that government spending generates revenue obscures a key detail: it depends what you spend the money on.

Because you'll get more of whatever you fund and less of what you tax. Pay people to sit around, and more will sit around. Pay them to have bad mortgages, and more will enter into foolish mortgages. Pay them to go to college, more will.

Also, even granting, for the sake of argument, that government spending will increase tax revenue, it stands to reason that some areas of spending would be more efficient at increasing that revenue; indeed, one can accept the notion that some government spending helps the economy more to produce revenue while other spending helps less.

Building a bridge over some river makes trade possible over the river, even as it puts the ferryman out of work. On balance, some amount of bridge-building is in the long run positive in almost every way. That doesn't mean we need to have a bridge within walking distance anywhere on every river, however, since after a certain point there is no advantage in having more.

But paying people money directly is the worst sort of expenditure. For every person delivered from homelessness into productivity by a government check, another (or a dozen or a hundred others) will cash the check and demand the next one, so they don't have to pay their own mortgages. It's a giant money pit, throwing the maximum investment at the minimum return. When such spending is done with borrowed money, compound interest paid on it will soon dominate.

The second argument will come from conservative supply-siders who will call for income-tax cuts rather than spending increases. They'll claim that individuals with more money in their pockets will get the economy moving again more readily than can government. They're wrong, for three reasons. First, income-tax cuts go mainly to upper-income people who tend to save rather than spend. Most Americans pay more in payroll taxes than in income taxes. Second, even if a rebate could be fashioned, people tend to use those extra dollars to pay off their debts rather than buy new goods and services, as we witnessed a few months ago when the government sent out rebate checks. Third, even when individuals purchase goods and services, those purchases tend not to generate as many American jobs as government spending on the same total scale because much of what consumers buy comes from abroad.

The insipidity here is breathtaking. The highlighted sentence in particular marks Reisch as a fraud, because saving money is a good thing. Where do people save money? Either in banks or in investments. Money saved in a bank allows the bank to lend money -- precisely as Reisch would have them do.

And what does he conclude after his violation of the rules of logic? That government must spend, spend, spend.

Which, oddly enough, is always what he concludes.

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