Basic Economics: What Works, What Doesn’t
The government wanted to reanimate the auto industry. It allocated billions to car makers to help them produce more energy efficient vehicles. This might reduce our dependence on wasteful polluting vehicles in a few years, or it might not. Just by offering cash for clunkers, however, within one week tens of thousands of inefficient gas guzzlers were replaced on our roads by more efficient, less polluting cars.
The government wanted to reanimate the real estate sector. It concocted elaborate, brilliantly thought out programs that got stuck in a bureaucratic morass and have proved virtually useless in achieving their desired aim. Then first time buyers were offered up to $8,000 toward the purchase of a new home and unsold houses suddenly began to be sold by the thousand.
The government wanted overall consumer spending to increase. The major effort to bring this about has involved sinking literally trillions of dollars into the banking sector to encourage banks to lend more so consumers could spend more. The banking sector has been “stabilized” by these initiatives, but banks didn’t turn around and lend out what they were given, so consumer spending didn’t benefit. But when the government gave $250 cash to Social Security recipients a few months back, much of this money was spent immediately.
There’s a lesson in all this —a lesson so simple and so obvious it seems to be largely beneath the notice of our economic masters. Since I’m a simple and obvious guy, however, I’ll note it here anyway. Give money directly to targeted consumers (car buyers, home buyers, etc.), or directly to folks who might save some but are more likely to spend most (like the elderly), and the economy will revive. Get cute instead, exhibit planning brilliance rather than common sense, trust clever middle men to pass it along as hoped, and watch the money disappear down the rabbit hole.
6 Responses to “Basic Economics: What Works, What Doesn’t”
Nailed it!
And a Republican is born. Go ahead and say it: tax cuts.
“Give money directly to targeted consumers”
So essentially, you want the government to say, “If you won't spend money, we'll take it from you and give it to someone who will.” You may be right that this is the quickest way to stimulate the economy, but is it worth it?
That's not even to mention the fact that the people getting the money are the least likely to actually need it.
I happen to have just posted on this topic: http://sovereignmind.wordpress.com/2009/08/09/c…
“The government wanted overall consumer spending to increase. The major effort to bring this about has involved sinking literally trillions of dollars into the banking sector to encourage banks to lend more so consumers could spend more. The banking sector has been “stabilized” by these initiatives, but banks didn’t turn around and lend out what they were given,”
Maybe true, but it certainly prevented a further contraction of credit. The bailouts may be distasteful, but it's really hard to deny that they prevented a collapse in the availability of credit. And by the way, the purpose of increasing credit is to help businesses invest, with the fact that it helps consumers as a somewhat nice side-effect.
Dr J, I'd be perfectly happy if the Republicans cut taxes and cut spending, too. But no, ever since Reagan, it's been cut taxes+raise spending=We Win Elections!
Reagan and Bush Sr. both put downward pressure on taxes and spending, though Clinton takes the trophy for fiscal responsibility. And post-Bush Jr, everyone seems to be back to their traditional roles, with the right advocating fiscal responsibility, the left trying to dismiss them as wicked. Which, golly, is pretty much what you're doing.
But Mr. Silverstein's post wasn't about parties, it was about noticing that individuals tend to spend money less wastefully than the government. If you've been hanging with leftists, I can imagine this coming as a surprise, but the rest of us simply recognize it as eternal and continually proved truth.