January 8, 2009

on 'Injection'

In response to someone who, once upon a time, was wrong on the Internet:

I'm sorry, there seems to be a confusion. When I speak of 'spending,' I'm not worried so much about concrete public works projects, (which need to be judged on an individual basis,) but Keynsean 'injection.' The former is a problem, only when it finds it's justification in the later.
Public transportation (the 'tube' is a metro or subway right?) is a classic example of an industry which has a good argument for public maintenance. It is high investment with low returns, but clearly beneficial to the public.
Injection, however, is the process of increasing the demand in hopes of stimulating an increase in the supply. The problem is, that if there is no demand to begin with, then growth in this area is meaningless. For example giving subsidies to the Big 3 will help them produce more cars, but if nobody wants Big 3 cars, then we are waisting our time, and, depending on how the subsidies are raised, worse, potentially creating bigger problems.
The problem with spending like this is that the money must come from somewhere. The other problem with it is that it doesn't have to come from anywhere at all. I'll explain: All governments have two sources for funds (private institutions have analogues, but for simplicity's sake we'll ignore those,) taxes, and credit expansion. Taxes remove wealth from the economy, and, when spent, redeposit it elsewhere. Ignoring bureaucratic expense, this is a simple wealth transfer. It necessarily results in a loss of demand elsewhere. Unless the subsidized service is genuinely needed, (consumers just can't generate enough demand on there own to entice the supply to meet their needs, ie., they can't afford food,) this usually results in a net loss for consumers.
Credit expansion, or rather, inflationary spending, which today is fueled primarily by credit expansion, (they don't actually print the money anymore) is a different beast. Wealth isn't explicitly removed from the economy, but the signifiers of wealth, credit, whether it be actually currency or low interest loans (ie bonds, subprime mortages,) are introduced. In a perfectly responsive economy, the value of the money would instantly go down and the net effect would be the same as the tax option. In reality, it takes a while for people catch on to what is happening. The long term effect is still a wealth redistribution, but in the short term there is the illusion of greater wealth and a corresponding increase in spending and decrease in savings. This results in a transfer of investment from capital goods (factories) to consumer goods (Sponge Bob toys.) Part of this increase is a reduction in unemployment. The problem with this, is that it is temporary, and necessarily carries a backlash with it: when people realize that their wealth didn't actually increase, they'll find that they have spent more than could afford on goods that don't offer a return on investment. (Credit expansion, in my opinion, is one of the causes of consumerism and all it's evils, but that's not important here.)
The Keynsian system capitalizes on the temporary illusionment of people to create a system of slow credit expansion, not to grow industry, but to reduce unemployment and to increase the perceived quality of life. The way this works is that the government works with the banks (In America, this works through a combination of the Federal Reserve bond market, and secondary markets in Wallstreet and in real estate,) to create a small and steady rate of credit expansion, the idea being that the rate will be too small fro people to notice and for the economy to adapt. It was acknowledged even then that, this was unsustainable in the longterm, but this concern was dismissed. Keynes is famously quoted as saying, "We are all dead in the longterm."
When this was first attempted in the US, it worked for several decades. Employment dropped through the fifties and sixties, and increasingly monolithic and monopolistic corporations did well with the support of government funds. In the seventies, the market finally adjusted and there was a spike in unemployment and a recession. In order to fix the situation, an increase in spending was necessary. In addition to a few partial fixes to the system, Reagan introduced a a lot of new, inflationary, spending, which eclipsed previous spending. In combination with massive growth in Wallstreet, which began to should more of the responsibility in inflation (Tthe government isn't the only entity capable of inflationary spending,) the effect was eventually recovered.
So now you have a better picture of what I mean when I say that spending must increase. I don't mean that you just have to spend more wealth, which is possible in a growing economy, but that you have to spend a greater and greater percentage of the economy. You don't just keep inflating the money supply, you increase the rate at which you inflate the money supply, which, empirically, is unsustainable.
If it were possible for a government, or firm, to increase the amount of wealth provided to an economy your system would work. However, the government only redistributes wealth in this way, or borrows against the future. if we had some guarantee the fund would be invested wisely, this would be no problem. However, Keynsian injection, which is what is implied by the term 'stimulus,' nearly guarantees the opposite. Money is pushed into the economy at random and people, believing that they are richer than before and can afford it (not realizing that they are borrowing against the future,) buy a new television instead of insulating the house. Done on a grand scale over time, and you have a greater portion of the mess that wee are in now.

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