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You can't spend your way out of debt

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Scribulus
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Today I had the something like the following conversation with a classmate, after listening to some teachers talk about a roomful of snazzy computers at our state-funded college that are about to be replaced by even snazzier ones:

Me: It makes me sick to see them go buy us all new computers when we already have these.

Classmate: But we need them.

Me: They're coming from someone else's money.

Classmate: It's in the budget.

Me: They took it from taxpayers.

Classmate: Well, I'm looking forward to them.

Me: You can't spend your way out of debt.

Classmate: It worked during the Depression.

Me: And made it last ten years longer.

Classmate: I would love to debate you on that.

That was the end of today's conversation. I had not been planning on initiating a debate, so I wasn't being careful, and I found that I could not remember where I got the information that government spending made the Depression last longer. If he brings it up again, I want to have my facts ready, but I'm not sure how to look for that information. Can anyone give me a pointer on how to track that down, or have any other good tips for how to direct this debate?

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You're in for it! The Depression is complex and hard to understand, with differing opinions of already learned men as to its cause and consequences. I am certainly not one of those learned men on the subject, but if you would like to be, you might try:

EDIT: Salsman's link is to a CD, but I believe the same material is available by ordering back-issues of The Intellectual Activist, where it was first published.

Edited by JASKN
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  • 2 weeks later...

Me: You can't spend your way out of debt.

Classmate: It worked during the Depression.

Me: And made it last ten years longer.

You already lost the argument when you conceded that "it worked during the Depression."

The U.S. spent its way into debt during the Depression. Debt was the effect, not the cause of FDR's policies.

The question begging to be asked here is whether we spent our way to recovery. That is the great ideological debate of our time, and it is being answered, not by learned men and crafty argument, but by the hard facts of reality. Obama is trying to spend his way to recovery. He will fail, for the very same reasons FDR failed.

If not for exigent factors (WWII), FDR would have continued to direct the flow of money by whimsical experimentation, stifling the ability of individuals to make long term economic plans and decisions. Men capable of making smart plans under those circumstances were next in the cross-hairs of the government's taxation. FDR continually drained capital from successful sectors to unsuccessful, out of a sense of fairness, but with the effect of punishing success, rewarding failure, diverting resources to their least efficient use, and spawning a rush of looters eager to profit from FDR's well-intentioned larceny.

The onset of WWII meant that the effort of the U.S. had to be directed towards a clear goal. This constraint on economic tinkering by FDR and his Communist inner circle (fact, not assertion) was all the American businessman needed to re-engage in long term planning. All that was needed for a robust post-war U.S. recovery and a consequent reduction in government debt, was the destruction of the rest of the world's industry, which was provided graciously by Nazi Germany, the Soviet Union and the Japanese Empire.

Unless Obama lucks his way into a similar conflagration (maybe we make our own luck?), there is no way for central direction of the economy to bring about recovery or to reduce debt. Human nature, to be commanded, must be obeyed.

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Actually, a question for the well-trained economists out there (I'll never be one, because the field is too infested with rank immorality):

Right now, people are worried about 'deflationary spirals', so the theory is that if you PRINT massive amounts of cash you can counter the deflation and things end up hunky-dory.

This, however, seems like two wrongs make a right. What's going on in the real economy?

Well, inflation is easy to explain: more money supply, your amount is unchanged, hence your share is diminished.

Here's the 'deflationary spiral'. Banks hold mortgages as assets. As the value of housing falls, the banks' balance sheets fall in value correspondingly. This means less money available to loan to new home buyers, and a depression in the market that causes yet lower home prices. That's just an example. This is obviously less clear cut than inflation. I guess in the real economy what you have is a bunch of people who were suckered by banks into spending more money (i.e.: value, production, share of gains from labor) on their houses then they needed to/than they were worth.

So what happens when you combine the two?

Well, property owners are disproportionately robbed of their wealth (as borrowers), as savers are disproportionately robbed of their wealth through inflation.

At the end of the day, the banks are 'solvent', but I guess I have to conclude that real production drops substantially. Think Bastiat's broken window. If a window doesn't break, there are resources left to buy something 'extra' in the economy. Likewise, countering deflation with inflation keeps prices level, and helps bank traffic remain constant, but at the cost of production. I think that basically translates into unemployment.

I can't help but conclude that combining deflation and inflation effectively retains the worst effects of both. Yet, only looks good on paper.

WHY DOES THESE MORONS HAVE JOBS AND PHD'S? I'm forced to resort to crappy amateur thinking because of their stupidity and inability to do their job (economists).

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Read "Capitalism: the unknown ideal" by Rand, there are several short essays there that refer to and explain the cause of the depression - and our present situation! It is amazing to read something written in 1960s that applies so directly to today's economic problems (and so INFURIATING that people have refused to learn the lessons and are making the same mistakes over again!). If I remember correctly, Ron Paul's book, "The Revolution: a manifesto" also adequately explains how the expansion of the money supply caused economic problems.

It is very difficult to explain the causes succinctly in one post and, without meaning to sound condescending, I doubt that your friend would be able to appreciate the true reasons for the depression without at least a basic introduction to economics. Economics is a vital subject to learn, but - like Roark - you only need to get the basics, then get out before they fill your head with nonsense. Gain a solid understanding of supply and demand, classical economic theory and pick up any Austrian text before they fill your head with all of their statist, Chicago school, crypto-Keynesian nonsense.

Put as simply as I can, government intervention causes depressions inadvertantly, through a deliberate policy of expanding the money supply with cheap money policy of lower than market rate, interest rates. This causes the huge boom time, the bubble, we have just been through and the huge bust we are currently experiencing. The availability of cheap money causes capital to flow unnaturally to uneconomic, bad investments, to unprofitable ventures - though they seem like a good deal at the time. It also causes people to take out loans that they could not afford at the true market rate - when economic reality asserts itself (as it always must) - people find that they will not get a return on their money, they find that they are unable to pay back their loans etc etc. You cannot artificially create economic growth... or rather, you can, but it will be temporary, short-lived and result in a prolonged recession.

Also, re: government spending to end a depression - it doesn't work. The argument (such as it is) goes "We need spending to stimulate the economy, as people don't want to spend so government must." Whilst it makes some sense on the most superficially intuitive level, the idea fails to stand up to merest scrutiny. Where can government get the money to spend...? a) taxpayers b] borrowing c) printing money d) selling assets

Ok, a) is out as raising taxes clearly limits the amount of spending in the economy. d) is also out, because you don't want to sell assets in a recession, you won't get a good deal. That leaves b] and c), with b] seeming to be the 'solution' of many governments. Okay, so they borrow the money to spend - if you leave aside the debt we will leave to your great grand-kids - it seems like a good idea to get out of the mess, right? Wrong. Where does the borrowed money come from? It does not come from the future as is alleged. It comes from today. It comes from the private economy, from bonds /gilts issued to banks and private citizens. I am not sure how they are denominated in the US, but anyone can afford to buy a British gilt. Private citizens then are lending their money to the government to pay for public spending now (what they call a stimulus) but there is ZERO net effect on the economy of this transaction as if the government did not issue the bond, the private citizen would likely have spent the money (stimulus) or invested it (stimulus) or left it in the bank (see next sentence). Banks also do not hold on to cash, sticking it under their mattresses, if they were not buying government bonds, they would have loaned the cash out to a business to invest (stimulus), a private citizen to spend (stimulus) or else invested it themselves (stimulus).

This angers me greatly - especially when idiot politicians or, even worse, "Economics correspondents" fail to grasp this relatively obvious fact and sanctimoniously pontificate about the failure of capitalism!

Ok, I have to go before I really start to rant...

Oh and I hate this smiley B)

Edited by rebelconservative
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Banks hold mortgages as assets. As the value of housing falls, the banks' balance sheets fall in value correspondingly. This means less money available to loan to new home buyers, and a depression in the market that causes yet lower home prices. That's just an example. This is obviously less clear cut than inflation. I guess in the real economy what you have is a bunch of people who were suckered by banks into spending more money (i.e.: value, production, share of gains from labor) on their houses then they needed to/than they were worth.

The villain here is not the banks who want to "sucker" people into taking loans they cannot afford to repay - why would they? it is not in their interest to have such bad loans on their books. The problem is government manipulation of the interest rates, to boost the money supply - making people think they are wealthier than they really are. Encouraging spending and home ownership via an artificial lowering of interest rates was explicit government policy (at least here in the UK) for many years. We are now living through the result of their hubris.

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Oh, thank you each for your input and the excellent links. I had forgotten about this thread, because the same classmate and I are struggling to gain real comprehension in a class where the teacher's pedagogy is based on the idea that showing people things they don't know about is a good way to stimulate learning, without connecting the new ideas in any meaningful way. With all that stimulus going on (read: overload), I forgot about the economics.

The Higgs paper is a very interesting idea. I also don't think my classmate is likely to be able to understand any of these arguments, but it is useful to me to study the subject--after all, it turns out I do hold the premise that the Depression lasted longer because of government spending, so I would do well to follow my own advice and find the evidence and establish the truth of the premise. Even one's own premises must come under scrutiny! One of the things I like about the Higgs paper is the bibliography that includes the original data from the government agencies that collected it. This is not a guarantee of correct thinking of course, but at least he's looking in the right place.

Edited by Scribulus
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  • 6 months later...

I am no Economics expert but I can account for the argument your classmate made. His argument rests on the Keynesian model of aggregate expenditure=C+I+G+(X-M). When G increases - buying more snazzy computers -, aggregate expenditure will increase and therefore stimulate the economy.

However this effect is short term, in the long run it hurts the economy. I have to break out the book to look for that. <_<

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However this effect is short term, in the long run it hurts the economy.
Yes, because with deficit spending, the government is paying out for goods and services is promises: promises that junior will pay for these goods and services some time in the future. So, junior is going to be worse off when he has to fork out more tax money. Further, so that they don't have to ask junior for so much, the government of the future will often resort to inflation, with all the problems that brings. When the accounts are all squared away, the total is less than it would have been. However, it is not less for everyone. The process is redistributive of wealth. So, some people end up with more and others with less. Edited by softwareNerd
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Yes, because with deficit spending, the government is paying out for goods and services is promises: promises that junior will pay for these goods and services some time in the future. So, junior is going to be worse off when he has to fork out more tax money. Further, so that they don't have to ask junior for so much, the government of the future will often resort to inflation, with all the problems that brings. When the accounts are all squared away, the total is less than it would have been. However, it is not less for everyone. The process is redistributive of wealth. So, some people end up with more and others with less.

Thank you for backing my arguments and saving my hassle of breaking out the books. The consequence of deficit spending would probably be a greater disparity of wealth among juniors (It would be easier to understand using the words taxpayers or the next generation), and that the highly uneven distribution of resources is not what economists wish to see.

Put government spending aside, if I were the authority of the college I would want to get the snazziest computers installed on my campus. Resources is put to best use when it is utilized, as opposed to leave it unused and stale.

Edited by anuse10
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Thank you for backing my arguments and saving my hassle of breaking out the books. The consequence of deficit spending would probably be a greater disparity of wealth among juniors (It would be easier to understand using the words taxpayers or the next generation), and that the highly uneven distribution of resources is not what economists wish to see.

Put government spending aside, if I were the authority of the college I would want to get the snazziest computers installed on my campus. Resources is put to best use when it is utilized, as opposed to leave it unused and stale.

You guys really haven't understood the Keynesian argument for why spending your way out of debt does work. You are attacking a strawman until you understand it.

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You guys really haven't understood the Keynesian argument for why spending your way out of debt does work. You are attacking a strawman until you understand it.

First you would have to specify exactly what is meant by "work", i.e. what is the goal that it supposedly achieves.

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I admit that I am a novice in Economics. Why don't you spit out your views? That's how a forum WORKS.

I'm not advocating Keynesianism here, just saying that no one has actually engaged with the Keynesian position. Keynes' position is not that if total govt spending increases, total govt debt will decrease. Rather it is that if total govt spending increases, total govt debt will increase, but decrease as a share of total GDP.

So that's the theory. If you're interested I can post empirical data on when this has actually been observed.

brian0918, you ask what the definition of "work" is. Well it works in the sense that total production and consumption in the economy increases. However whether you view that, or the means of how that is acheived, as immoral is down to you.

Edited by RichyRich
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Well it works in the sense that total production and consumption in the economy increases.
Sure Keynesianism "works" under in a certain sense. That is what Brian was alluding to. It can raise aggregate demand under certain conditions and in the medium term. In particular, when an economy hits a point of monetary deflation, fiscal spending can raise aggregate demand. (Strictly speaking, advocating this in a deflationary scenario is not uniquely Keynesianism -- a lot of pre-Keynesian economists said exactly the same thing, and post-Keynesians like Milton Friedman would agree.) Prior to Keynes's ascendancy, many governments ran Federal surpluses. We've had decades where Keynesianism has ruled the roost in Economics. During that time, we have seen government deficits as a percentage of GDP rise, not fall. Japan is a great example of how Keynesian fiscal spending has kept the economy from tanking more than it would have, while also keeping it from growing as fast as it ought to, and leaving the Japanese with a huge deficit.

If Keynesianism did not "work" in the way it does, it would never have gained popularity. It is an intellectual framework that offers a slightly obscured way to redistribute wealth (generally from savers and the competent to spenders and the incompetent). What one can never measure is the things that never will be: the assets that have been consumed in the raising of aggregate consumption which will thus never be available to be invested.

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Paul Krugman, the celebrated Keynesian economist, has addressed this exact topic in his blog:

October 25, 2010, 3:42 am

A Far Away Country Of Which We Know Nothing

I’ve been getting a lot of correspondence lately that runs something like this:

You’re an idiot. Give me one example in all of history of a country that spent its way out of a depressed economy

Ahem. There’s this country — people may not have heard of it — called the United States of America:

debtdepressionwar.PNG

The blue line is total debt, public plus private, in billions of dollars; the red line debt as a percentage of GDP (both on left scale).

But that was different, you say — it was a war! To which I reply, you think it’s better if we spend all that money on useless things?

Sigh.

http://krugman.blogs.nytimes.com/2010/10/25/a-far-away-country-of-which-we-know-nothing/

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He thinks WWII was useless?

Has he checked his ancestry?

I don't think he's using "useless" as a word to judge the decision to enter WWII. Rather he's saying that we should spend the same as we spent during WWII today, but since we are not in a world war, we can spend it on "useful" things such as bridges and hospitals, instead of fighter planes and tanks.

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Paul Krugman, the celebrated Keynesian economist, has addressed this exact topic in his blog:
I don't know if you're trying to pull the wool over our eyes, or if you're the one being deceived here, but quoting Krugman would be like me quoting Mark Perry. I could be equally dishonest and present the following graph, claiming it shows the more typical relationship between government Debt and debt as a % of GDP.

post-1227-0-10558100-1295382728.jpg

Sigh
Cut the crap! Either discuss and argue in good faith or get lost.

post-1227-0-10558100-1295382728_thumb.jp

Edited by softwareNerd
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Well if the celebrated Krugman has spoken, the case is closed. I guess we can ignore all the enormous amount of literature presenting arguments against this myth, and the argument SNerd presented earlier in this thread, that all government spending is a simply a redistribution to group A at the expense of group B and does not produce a single brick, “create jobs,” cause wealth to come into existence, or satisfy wants of consumers. And if the spending is financed by printing/borrowing from the commercial banks, it means credit-expansion, boom and bust (which is method Krugman and Keynes advocates.) Not to mention the reductio ad absurdum that if the government's spending brought about “the miracle of turning a stone intro bread,” i.e. mystically created wealth and prosperity by fiat, then we would not be able to explain the existence of a single poor country, or even a single poor person, as all countries can engage in deficit spending financed by inflation.

Nope, we are to believe the economy is a perpetual motion machine (“circular flow”) and the way to produce is to start by consuming (“paradox of thrift.”) Their mathematical equations, formulas, and charts say so, and thus invalidate logic. C + I + G + (X-M) = Y(GDP). Don't question it the fact that the G means a gun pointed at your mind, and that everything spent by G comes at the expense of C, I, X, or M. Don't question it, just obey the models. “With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid.” [Edit: source of that quote.]Keynesians are truly the scientologists of economics.

Edited by 2046
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I don't know if you're trying to pull the wool over our eyes, or if you're the one being deceived here, but quoting Krugman would be like me quoting Mark Perry. I could be equally dishonest and present the following graph, claiming it shows the more typical relationship between government Debt and debt as a % of GDP.

Cut the crap! Either discuss and argue in good faith or get lost.

I hope you don't think I "sighed". That was Krugman in my quote box. With the graph you posted I would say that is indeed the typical relationship between increasing debt and debt as a % of gdp. I think most Keynesians would agree. Krugman (as far as I've seen) argues for stimulus only when in a liquidity trap in a depressed economy.

I'm not advocating Keynesianism here. I just contributed because I think that people weren't addressing the actual arguments just strawmen.

People could have made this a whole lot simpler by just posting this: :thumbsup:

The Empirical Case against Government Stimulus

http://mises.org/daily/4648

I've been reading this source for the past ten minutes and it seems interesting but biased. It only mentions the Keynesian's strongest point (WWII) in the last paragraph and only briefly. I'm going to read this WWII point again tomorrow as I've actually typed this sentence last and it's getting late.

With regards to the ECB historical points in the mises article, I think Krugman's reply is good. He summarises with:

So every one of these stories says that you can have fiscal contraction without depressing the economy IF the depressing effects are offset by huge moves into trade surplus and/or sharp declines in interest rates. Since the world as a whole can't move into surplus, and since major economies already have very low interest rates, none of this is relevant to our current situation.

Mises.org replies to this by saying:

It's not worth commenting on Krugman's reaction just yet; let's get some more samples.

They never actually get round to commenting on why Krugman was wrong in his explanation.

For the Rogoff paper, again Krugman posts his reply with what I think are reasonable explanations. Mises.org replies with:

Now things are already starting to look a little shaky for Dr. Krugman and his Keynesian allies. They have been backed into a corner, having to explain away (at least) nine historical episodes that contradict their theories. Sure, maybe one, two, three, even four of those examples really are irrelevant; but all nine? At what point should we start to question the basic Keynesian premise, namely that having politicians borrow and spend a bunch of money is a way to help the economy?

Again they never explain WHY Krugman is wrong when he gives reasons for why Keynesianism didn't work in each of the cases.

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Krugman (as far as I've seen) argues for stimulus only when in a liquidity trap in a depressed economy.

I'm not advocating Keynesianism here. I just contributed because I think that people weren't addressing the actual arguments just strawmen.

Well, the facts of a "liquidity trap" (as opposed to the differences of opinion on how one gets there) are that loan demand -- the broadest measures of near money -- are flat or falling. Using these broad measures of money and near-money, it is scenario of monetary deflation. As I said in a previous post, in times like that fiscal spending can raise aggregate demand. I don't see how that acknowledgement of facts passes as a "straw man".

Krugman (as far as I've seen) argues for stimulus only when in a liquidity trap in a depressed economy.
That graph does not describe a scenario of a liquidity trap.

I hope you don't think I "sighed". That was Krugman in my quote box.
I apologize. I did think that was your addition. I ought to have known better. Krugman is basically a political commentator pretending to be an economist. If you want a serious an honest left-wing (almost commie) economist, I suggest Australian Steve Keene. The guy is wrong about the morality of good policy, but he is very upfront and factual in his analysis.

Edited by softwareNerd
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