The new stimulus package

by Russ Roberts on January 6, 2009

in Stimulus

The Washington Post reports:

The government’s billion-dollar program to help people prepare for the
transition to digital television has run out of money, potentially
leaving millions of viewers without coupons to buy converter boxes they
need to keep their analog TV sets working after the switch.

So guess what people are going to do? They’re going to buy new digital televisions, saving the economy. Brilliant.

You know what’s next? Government workers will come into your and trash your current television with a sledge hammer. Result? More stimulus! People will have to buy more televisions! Then we’ll save the auto industry. Sales are way down. The automakers are broke. No problem. Just force people to turn in their cars. Don’t melt them down and get something useful in return. Just destroy them. Car sales will go through the roof! The economy will be saved!

It is important to remember, as my co-host Don likes to point out, that it’s easy to create jobs. The hard part is creating productive jobs. Jobs alone do not create prosperity. Creating wasteful jobs reduces our standard of living.

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{ 20 comments }

MnM January 6, 2009 at 1:35 pm

Will we never be rid of that damned broken window fallacy?

scott clark January 6, 2009 at 2:26 pm

this is better stimulus than that, Russ. See, one household can get two $40 coupons, $80 value. THen you go to walmart or best buy and buy the converter box. Then you return the converter box for cash or store credit, whoop whoop, stimulus.

muirgeo January 6, 2009 at 2:34 pm

"Jobs alone do not create prosperity. Creating wasteful jobs reduces our standard of living."

No doubt. Those people on Wall Street under supply side economics went from 10% of corporate profits to over 30% producing pieces of paper that were not only worthless but had large negative value. All sucked right out of the middle classes income and retirement funds. Talk about wasteful jobs reducing our standards of living. And now they are just sitting on piles of money with no trustworthy places to invest and no one else with money to spend and buy the things they might wish to sell anyway.

Until they give back some of their ill gotten wealth we can all just sit here and watch the paint dry and the economy crumble further. No stimulus will come from people with lots of money hoarding even more, none will come from overseas and none will come from the bankrupt consumers in the middle class trying to pay off their ever rising finance charges on their credit cards as the bankers suck them even drier all with the help of less reguulation on credit cards and improved bankruptcy laws favoring the huge corporate loaners.

I guess the supply siders expect demand just to occur out of thin air.

scott clark January 6, 2009 at 2:35 pm

one more step, you might have to cancel your cable subscription for the day that you apply for the coupons, if you don't want to lie to the gov't.

ben January 6, 2009 at 3:33 pm

Muirgeo, you are utterly and completely and totally useless. Shame on you and your trolling.

AisA January 6, 2009 at 4:47 pm

Muirgeo wrote:

I guess the supply siders expect demand just to occur out of thin air.

Demand comes from production. If we lived in a barter economy you would be able to see this.

Suppose, for instance, you lived in a barter economy wherein you produced potatoes to trade to the baker for bread and to trade to the tailor for clothing. Under these conditions, it would be immediately apparent to you that the ONLY way for you to EVER increase your demand for bread or clothing is to first produce more potatoes with which to trade for more bread or more clothing. It would be equally obvious to you that if you stopped producing potatoes, your ability to demand any bread or any clothing would go to zero. There would be absolutely no doubt in your mind that demand comes only from production.

What’s more, it would be equally obvious to you — under these conditions — that if a man comes along and simply steals a portion of your potatoes without offering anything in trade, this does not constitute an increase in the demand for potatoes and doesn’t leave you better off.

Now suppose our little economy agrees to move away from our barter system and instead starts exchanging paper dollars for products at mutually agreed-upon prices. So now you sell a pound of potatoes to the baker and the tailor for a dollar, and they in turn sell you respectively 5 loaves of bread for a dollar and a pair of socks for a dollar.

Note that the existence of money has changed nothing. If you wish to increase your demand for bread or clothing, you will still have to produce more potatoes to sell to raise more money to purchase more bread or clothing. Demand still must come from production.

Now suppose one day the baker’s oven blows up and he can no longer make bread. Since he can no longer sell bread to acquire money, he can no longer purchase potatoes and clothing. Since production has gone down, demand for potatoes and clothing has gone down.

The baker is now “unemployed”. Since bread is no longer being baked, economic output has fallen and we have a “recession”. Prices for potatoes and clothing fall because of the fall in demand. We have “deflation”.

Now, would this problem be solved if the unemployed baker stole enough money from the potato farmer and the tailor that he could once again start purchasing their products? Would that restore the “lost demand” and correct the “economic contraction“?

No, that would simply be analogous to the man who stole potatoes from the barter economy. The new purchasing done by the unemployed baker — using the money he stole from the potato farmer and tailor — would simply be a case of returning the potato farmer‘s and the tailor‘s money to them, with the unemployed baker acquiring some potatoes and clothing in the process. No new production has occurred. No new employment is created. All we‘ve done is impoverished some to help others. Yet, at root, this is the exact essence of the government’s “economic stimulus” plan, except it‘s the government that will do the stealing.

This is why the “stimulus“ plan is doomed to fail. Only an increase in production can result in an actual increase in demand. Anything else is merely reshuffling and redistributing.

cpurick January 6, 2009 at 5:07 pm

ARE YOU GUYS REALLY UNABLE TO DO ANYTHING ABOUT THE STUPID TROLL??????

ARE YOU STILL GLAD YOU WELCOMED HIM BACK??????

Oil Shock January 6, 2009 at 5:28 pm

Michael Smith,

Well said. But muirgeo gets dazzled easily by quack economists and their monetary calculations. Anything a priori is beyond Muirgeo's comprehension.

Charlie January 6, 2009 at 5:28 pm

Russ,

This post seems totally manufactored. There is nothing in the article about stimulus or the broken window fallacy. The switch to digital has nothing to do with stimulus and was planned a long time ago. This will clear up huge amounts of the broadcast spectrum for other uses such as wireless services. If it takes a one time payout of a billion or two billion dollars to make it pareto dominate the status quo, then that is a great trade.

Charlie

muirgeo January 6, 2009 at 7:58 pm

"Demand comes from production."

Michael Smith

Balony. A lot of extra house were built(produced) over the last decade… how's the demand for those houses doing now?

If people don't need pototos you growing extra will not produce demand. Or if people have no extra cash in which to buy extra pototos growing extra will not help you a bit.

DEMAND COMES FROM WORKERS WHO MAKE A DECENT WAGE!!! When almost no one has any money to spend because it has been hoarded by a small number on top there is NO DEMAND! The problem today is a problem of massive income inequality and stagnant wages which has been consitently denied as significant or the data has been denied outright here by most on this blog.

If demand comes from production then why aren't the guys with all the money investing it to produce things to create demand?

Ben/cpuick. I am not a troll. I am arguing a side of the issue well supported by literature, data, history and professors of all expertise and if that makes you and your world view uncomfortable then that's YOUR problem not mine. I look at both sides of the issue something you have no interest in doing.

Sam Grove January 6, 2009 at 8:50 pm

Demand arises from our nature as biological beings requiring sustenance and from our intellectual nature requiring diversion from boredom.

George has limited capacity to imagine. This seems to be generally true of a lot of people who think that our choice is only between progressive liberalism or the dark side.

This is the way things are, this is the way they will always be, and all we need are "the right people" in positions of power to make us better off.

Oil Shock January 6, 2009 at 9:01 pm

Balony. A lot of extra house were built(produced) over the last decade… how's the demand for those houses doing now?

It is not as if there is no demand for houses. The prices have to adjust to the supply and demand reality. Infact the abundant supply of houses is what it makes it affordable. But then socialists want to prop up the price of houses so that 35% of the population( mostly the poorest ) will never be able to afford it. Even the large majority of the other 65% will remain choking under their mort-gages(death pledge)

The areas largely infested with progressive type parasites are usually the most expensive places to live; talk about taxing and regulating (zoning, environment laws) to death.

Oil Shock January 6, 2009 at 9:07 pm

I look at both sides of the issue something you have no interest in doing.

Yeah? If you are such an independent unbiased thinker, list 10 areas where you think your progressive socialist buddies are dumb as a dogpile and you whole heartedly agree with those you usually disagree on other matters. Tells us why you agree with your usual rivals.

Let me see if you can talk about anything other than the communist manifesto.

cpurick January 7, 2009 at 7:41 am

"I am not a troll."

Worse: you are a lying troll.

Anonymous January 7, 2009 at 10:05 am

"Balony. A lot of extra house were built(produced) over the last decade… how's the demand for those houses doing now?

"It is not as if there is no demand for houses. The prices have to adjust to the supply and demand reality.
Posted by: Oil Shock | Jan 6, 2009 9:01:21 PM"

Damn, OS, you beat me to it.

Only a broken brain like muirduck's could automatically believe that because people are having trouble paying for a house that demand had gone down. Demand is as strong as ever as is proved by the increased number of renters, many of whom probably just moved into another house vacated by someone who could not afford the payments any longer.

vidyohs January 7, 2009 at 10:06 am

Whoops, the last was mine.

Tim January 7, 2009 at 12:04 pm

Sounds like the plot of A Brave New World.

Christopher Renner January 7, 2009 at 12:24 pm

Oil Shock: If you are such an independent unbiased thinker, list 10 areas where you think your progressive socialist buddies are dumb as a dogpile and you whole heartedly agree with those you usually disagree on other matters.

How about just one area? That would be astonishing enough.

Bill Woolsey January 11, 2009 at 6:47 pm

It isn't that the supply of houses automatically creates a demand for houses. It is that the supply of houses is a demand for other things–people produce and sell houses to earn income to buy other things.

The problem, occurs, when people supply things in order to "buy" money. The way one "buys" money is to produce and sell things and then not spend the money. For an individual, this inreases money holdings. One has "bought" money.

If the demand for money is greater than the supply of money, this shows up as a surplus of everything else. People want
to "sell," that is, earn an income by producing things, but they don't spend enough. Well, they are "spending" on
money.

If the quantity of money is fixed, the market solution is for all prices and wages to fall so that the real supply of money rises to meet the demand.

An alternative solution is to use monetary policy. The quantity of money is increaced to meet the demand.

The third approach is for the government to sell bonds, with the idea that some of those currently holding money are willing to hold these government bonds instead. The govenrment spends that money, etc.

The arguments about this will be wasteful government spending involve the alternative use of the resources that will occur when the private sector increases spedning once prices are low enough, or, in the siutuation of monetary policy, what those receiving the new money will spend it on.

beautifulbri04 January 16, 2009 at 10:32 pm

Charlie, learn to spell please…"manufactored"

Come on, that's elementary words, pal!

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