Keynesian Stimulus

Sorry, I have some religious topics to write about too, but right now I'm on this economy binge.

Let me try to explain in a comprehensible way my own conclusions on the problem with the Keynesian idea of paying a man to dig a hole and an other to fill it back up just to get the money circulating.

A couple of posts ago, I explained how wealth is created in a transaction. The producer of a product creates the product for less money than the market value. Thus in a fair exchange, the buyer receives a product of v value, and the producer receives p=v in payment, which is greater than the cost of production c. Therefore the buyer's wealth remains constant, while the producer gained p - c = g (or v - c = g, since p = v). That amount, g, is new wealth produced.

So let's look at what happens in the Keynsian idea of government spending.

Consider the idea of paying a man to dig a hole and fill it back in. What happens in that transaction? The government spends v payment to the worker. But what does it get back? Nothing. The product is worth zero, and therefore we substitute 0 for p. 0 - c = g. So our net wealth gain in this transaction is a loss of the total cost.

Now, in the case of the shoveler, there isn't any cost for the product, right? Of course there is. For any service provided, you not only pay for the materials but also for the time and labor. c = m (materials) + l (labor). m is 0 in this case, but l is positive. What the value of l is is hard to understand, for the answer is dependant on the shoveler, and what he could be doing instead. If the man is unemployed l is relatively small. But it is almost never 0. For even if he's not working, he could be working on his quality of life, looking for a job, or learning. These activities have value. Only if a man is completely unmotivated and makes absolutely no effort to make any progress is his time completely worthless (which sadly is not unheard of).

Alright, now, for the sake of the argument, let's assume the shoveler has a minimal l, thus the immediate transaction has a minimum immediate loss. No big deal. So what happens now?

First we have to consider where the money came from. Did we borrow it? At what rate? What will pulling that money from the lender do to their economy? How will that effect the global economy? Or did we print the money? What does that mean for the value of the dollar?

Ok, let's first assume we borrowed the money. The primary immediate concern is the interest rate of the loan. How much more is that going to cost and how fast? How fast can that shoveler take that money and resubmit it into the total economic system. Here's where I think the Keynesians steer wrong. If all the money flowed into the system immediately, then yes, the system of achieving possitive g causes the money to multiply. But how much money does the shoveler really invest back into the system? Some for food, some for clothes, some for toilet paper. The rest he saves. He's poor and unemployed. He has to save. There's the paradox of saving that Keynsians often discuss.

If, for example, the shoveler was paid enough to fund the starting of a business that produced a product that made a possitive g, than the governments investment will pay off if g is greater than the interest paid i on the loan. This is the only way the investment will work. But what if the money is not invested, or invested cautiously or poorly? Then g is 0, or small, or perhaps even negative. If g is less than i, the economic situation is even worse off than it was to start. And even if g is greater than i, unless it's a large margin the recovery will be slow.

Now, suppose instead that we print the money. What happens then? There is no interest rate, but everyone's money now becomes worth less. So the overall g must be greater than the decrease in the value of all money. We're still in the same situation.

But the biggest issue with Keynesian economics is the requirement of the ethics and discipline to repay the debt. Not only is it unwise to pay intrest on a debt for an extended period of time, but leaving a debt to be paid by the next generation is flat out irresponsible, unethical, selfish and wrong. We simply don't have the moral discipline to pay this debt back in good times. We are a culture of gimme gimme and mine mine. We don't care what burden we put on others as long as we don't have to bear that burden.

Now let's consider the this stimulus package. What is the transaction gain g? For example, we're planning on spending on STD prevention. What is the return? The immediate return is very small if it's anything at all. There's no wealth increase there. Longterm, the money may or may not end up getting invested in new or expanding business. If it does, the return on investment will be delayed and therefore small (an investment with a very good 10% ROI that's delayed just 1 year returns 0% the first year, 5% after 2 years, 6.67% after 3 years, etc). And at what cost c? It's large, isn't it? That transaction has an immediate value loss of -c. The eventual return must supercede that, and the longer it takes the greater that number becomes due to interest costs.

What about infrastructure? Roads, buildings, utilities, etc? These have an ROI, but it is small and is also slow and delayed and therefore even smaller. What return does improving a road give? It improves efficiency. But how much? How many businesses will have increased gains because this road is improved? The idea of infrastructure spending being a stimulus is bogus. It can possibly be termed a long-term investment, but it would more accurately be called simply a standard of living investment, which has no return (just makes people happier). In no way could it be called a short-term stimulus.

Or what about the research? Research is slow to have a market effect, but has potential for great returns. Technology development finds new ways to drive down costs, increase production, increase quality, and improve the standard of living. Standard of living technology, again does not have a real return. But we're not investing in new technology. We're going to invest in climate change research. We'll invest in green energy. I agree with green power! It's a good thing. But its current high costs and inefficiencies will do nothing but hurt current economic development in the short term. Only once it becomes less expensive than the current power sources will it help the economy. If the environment is a bigger concern than the economy, fine. State it that way. Do not tout it as an economic stimulus, for it is the antithesis of such.

This stimulus could work if it was invested in businesses, wealth producing, real investments that return a possitive wealth. Could. Will it? I think it will have a temporary stimulus effect. But because it is not going to produce wealth, the recession is merely postponed. It's like taking out a loan to buy more liquor. It gets you through the next month, but when it's over you're in an even larger hole than you started in. That's what will happen. If the loan was used wisely, if the man was able to kick his habit and become responsible, then he could make it. Government hasn't kicked the habit, and doesn't want to. They just want a new excuse to buy more liquor.