Saturday, July 10, 2010

Why Stimulus Actually Kills Jobs

Paul Krugman has got to be the top shrill for deficit spending to bring ths economy out of the current downturn. He went nearly apoplectic when the G-20 was meeting and Obama was the lone voice of more spending. An there has been head scratching recently on why no jobs given all the stimulus. There was even an article saying we've reached the limits our economic theory, that there's no guidance on where to go from here.

What these guys miss though is that money spent through the government is far less efficiently spent that if it were spent through the private sector. Spend a $100: the value of what you have to show for that is far less if spent through the government than if it were spent through the private sector. When the government spends money, it first obtains it through taxation or borrowing (forgetting for the moment that it also obtains it by printing it, more on that later), thus removes it from how it might otherwise be spent. Money that is taxed to be spent by the government is not being spent by the person who originally earned it. Money that is borrowed is not being invested in the way that it otherwise might have been invested. That's what these guys miss. It's an oppurtunity cost thing.

And so today, I find a very interesting article by Andrew B. Wilson called One Job Forward, Two Jobs Back. It makes a lots of the points I am making here but it also adds a data point or two that I find interesting. Obama was in Nevada announcing the expenditure of $2 billion dollars to build solar panels which will result in the creation of 1500 permenant jobs. That's over $1.3 million invested for each permenant job created.

The fact that Obama is out there campaigning and bragging on this shows how clueless he is. The private sector can't get away with spending over a million dollars to create just one job. I know people who've invested no more than about $20,000 for the viable job they've created for themselves.

Back to printing money. That's the third way the government finances its spending. It issues government bonds, the Federal Reserves buys them out of assets conjured out of thin air and voila, printed money. Now Paul Krugman et al's big fear is that we get in a deflationary spiral and that deficit spending is required to avoid that viscious circle.

I'd suggest that if the government is do spend to avoid a deflationay spiral, that it be done ONLY with printed money, not with taxed or borrowed money. The government should not be diverting money from the private sector for stimulus purposes as that does more harm than good. Print the stimulus money for stimulus. And be very ready shut off the tap as soon inflationary pressures manifest themselves.

There's a caveat or two that I could add to this but I'll let this stand as it is.

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