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Saturday, January 26, 2008

Fiscal Stimulus, Chia Pets, and a Crazy Theory

Allegedly, as part of its "stimulus package" the government is going to be giving people rebates on their taxes. However, retirees living on social security benefits are apparently angry they are not getting a "rebate,"so Senate democrats are preparing measures to include them.  (So they believe people who don't work and get a check from other people that do work have every right to be angry that the working people are not going to send them more of their wages?)

Ostensibly, if the premise of this action is that letting people keep their money is a stimulating thing to do, then why stop at $1,200? How about $1,300, or $5,000, or all of it? How about as I proposed in a previous post the government gives everyone 1 billion dollars? What's wrong with that?

Of course, its always good to let people keep more of their money. But has there been any talk about cutting government spending commensurate with the tax rebates? If not, logically doesn't this mean that the government's budget deficit will be larger than otherwise and it will have to borrow more money than otherwise? So, among other things, won't this plan drive up the interest on the deficit and/or increase inflation which will actually cost us all more in the long run?

Another aspect of this bothers me. Why do people think that the act of "spending" money is necessarily good for the economy? What if everyone spent their money on pet rocks, Chia pets, and dirt? All it would do is encourage producers of rocks, Chia pets, and dirt to make more Chia pets and the owners of these businesses certainly would make a lot of money. But, is this good for the economy in aggregate? Is the act of one person transferring his money for something else necessarily good? If I'm at the mall, and I watch someone buy a pretzel or a candle, how does that help me?

To quote a previous post: What really drives economic progress, i.e., real wages, living standards, etc.? The answer is productivity. If we can spend less time doing what we do now, it gives us more time to invent new things. Why is it that each of us don't have to spend all day hunting for food everyday or stockpiling wood for the coming winter like our ancestors? Practically 100% of the country used to be farmers. Now it's less than 5%. The greater division of labor that results from increased productivity frees everybody else to invent wonderful new things like computer chips and life saving drugs and run businesses like restaurants and art galleries. And what increases productivity? Capital investment.

Let me end by revealing a shockingly controversial plan based on a wild theory of economics I have been dabbling with recently: What if the government cut its spending? I know, I know, its a lot to take in, but just bear with me for a second. If the government cut its spending and then cut taxes people could keep more of their own money and it would not drive up the budget deficit. Wait, it gets crazier! If the government only spent what it took in there would be no budget deficit at all. This would further cut government spending by not increasing the amount of interest on the deficit. It would drive interest rates lower as there would be less competition for capital in the bond markets. It would drive inflation lower as the government wouldn't have to print as much money to buy bonds to fund its deficits. More capital in the hands of businessmen would lead to greater productivity, higher real wages, and increased standards of living for everyone as I just explained.

Wait, nah, forget it. Would never work. Just send me my billion dollars.

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