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Brilliant Refutation of Moronic Economic Thinking

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ravochol posted on Thu, Oct 14 2010 4:39 AM

Why Printing Money Makes Sense

Right now, even a counterfeiter issuing dud dollars would be better for the economy than our deficit-fixated policymakers

By Dean Baker

October 13, 2010 "
The Guardian" --- Beneficent Counterfeiters and Economic Stimulus

President Reagan once famously quipped that everyone who is supports abortion has already been born. In the same vein, it is worth noting that all the policymakers who don't think we should worry about 9.6% unemployment have jobs.

This simple fact cannot be repeated enough times because it explains a huge amount about current economic policy. For the tens of millions of people who are unemployed, underemployed or have given up looking for work altogether, we are in a crisis. The economy is an absolute disaster, ruining their lives and also jeopardising the futures of their children and grandchildren.

But that is not the way that the people paid to contemplate economic policy in Washington see things. This gang is busy congratulating themselves because things could have been worse. They point out that if they had been even more incompetent that we could be in a second Great Depression with unemployment staying in the double digits for a decade.

Instead of worrying about the millions of unemployed workers today, they are worried about their deficit projections for the years 2018, 2020 or even 2025. This crew, which could not even see the $8tn housing bubble that was about to wreck the economy, wants the whole country to genuflect before their projections of deficits for 10-15 years into the future. This situation really would be funny if it did not lead to so much unnecessary suffering.

Obviously, we have to teach some elementary economics to the geniuses who design economic policy. The basic problem we face is a lack of demand. Note that this is the exact opposite of the deficit fixation – budget deficits are a problem when we have too much demand.

To better understand this demand problem, suppose that we had a super-effective counterfeiter: someone who could make near perfect copies of $50 or $100 bills. Suppose this person printed up $2tn of counterfeit money and began to spend it on all sorts of items. Our counterfeiter buys up houses and cars. They pay for incredibly lavish parties and trips. They hire all sorts of servants, groundskeepers and investment advisers.

What would be the effect of this counterfeiting scam on the economy?

In the current situation, it would provide an enormous boost to GDP and create millions of jobs. After all, everyone thinks the money is real. It is no different whether the counterfeiter and his underlings spend $2tn of counterfeit money or if firms suddenly start investing their hoards of cash or households begin to spend again as though the housing bubble had never collapsed.

That may sound troubling, but this is because the current economic situation is so extraordinary. In normal times, the economy is, at least partially, supply-constrained. Collectively, we want more goods and services than the economy is capable of producing. If our counterfeiter manufactured his $2tn in normal times, it likely would cause a serious problem of inflation. There would be more demand for cars, houses and other goods than the economy was able to supply. This would push up prices and wages, leading to a cycle of inflation that would persist until policy measures were taken to slow the economy – or the counterfeiter was caught.

In our demand-constrained economy, however, there is no problem of inflation. The economy can produce more of almost anything right now. The reason that we are not doing it is simply the lack of demand.

But the interesting part of the counterfeiter story is that his $2tn of phony money will not create problems even in the long run, assuming that he is eventually shut down. Suppose that the counterfeiter's lavish spending gets the economy back towards full employment around 2012, at which point he gets nailed by the FBI who finally figure out how to recognise the dud notes.

At that point, the $2tn will be grabbed out of circulation and destroyed. Assuming that the economy is strong enough at this point to remain near full employment even as this counterfeit wealth disappears, then there would be no lasting damage from the episode. The fictional wealth had generated demand when the economy needed it, but then was pulled out of circulation at the point when it could have generated inflation and "competed away" goods and services from others.

While it is unlikely we will see a successful counterfeiter on this scale, the government and the Federal Reserve Board can imitate the counterfeiter's actions. This is the story of fiscal stimulus: safe, fun and legal. Instead of putting people to work filling the counterfeiter's frivolous whims, we could have them work to build up the economy and meet important needs. The list of necessary tasks is long and well-known.

As is the case with the counterfeiter's illicit stash, the stimulus spending need not even create any long-term debt burden. The Fed could simply buy and hold the bonds issued to finance the spending. When the economy returns to more normal levels of employment, the Fed would raise interest rates, as it always does, to prevent inflation from posing a serious risk.

It's all very simple. Unfortunately, our Washington politicians lack the courage to take the necessary steps to get the economy back on its feet. That means that the best hope we have right now might be a very successful counterfeiter.

Dean Baker is co-director of the Centre for Economic and Policy Research

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So he's saying politicians in Washington don't like to spend money? Hahahahaha!

Deficits are at an all time high, and he's complaining about politicians fixating on deficits?

edit: I considered writing some sort of economic reasoning in Bastiat style, money != goods, that wealth is not how much money you have, but what you can buy with it. Then there's distortions of the structure of production, creation of unsustainable bubbles, etc. all resulting from his counterfeiting. You guys all know this stuff, but this guy isn't worth it.

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It reminds me of the 4 most expensive words you'll ever hear from the state: "This time it's different".

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" money != goods"

 

unemployment =  unitilized capacity =  less total REAL WEALTH.

full employment = maximum capacity = maximum total wealth produced.

 

I think you missed the entire point of the article.

 

Just admit that what "the market" means to you is the wealthy having their every whim catered to and to hell with anyone else. Admit you'd rather see people starve than offend Bastiat.

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Sieben replied on Thu, Oct 14 2010 9:55 AM

Rav, you can debate me on this topic at debate.org if you want to have a real discussion.

 

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 Total U.S. Manufacturing capacity = 72.2%.

 

People need goods, producers need compensation. Facilitating that is the ONLY purpose of money. Right now, there are a lot of people going without things they need, and a lot of producers who could be producing a lot more. The problem is it's not being facilitated.

Start throwing money out of helicopters on to poor people, (not on to banks) and it would be, in a second.

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Sieben replied on Thu, Oct 14 2010 10:00 AM

I'd engage you but you have a bad habit of running away. Seriously, challenge me to a debate on this topic at DDO.

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We have unemployment because there exists a suboptimal mix of factors of production.

This suboptimal mix was created by government distortion of price information, and this guy is just advocating further distortion.

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unemployment =  unitilized capacity =  less total REAL WEALTH.

How many more condos are needed in Florida?

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Answered (Not Verified) Rettoper replied on Thu, Oct 14 2010 12:14 PM
Suggested by Sieben

People need goods, producers need compensation. Facilitating that is the ONLY purpose of money. Right now, there are a lot of people going without things they need, and a lot of producers who could be producing a lot more. The problem is it's not being facilitated.

Start throwing money out of helicopters on to poor people, (not on to banks) and it would be, in a second. -- ravochol

BY this logic, all we need to do is plant more trees and print more money to eliminate scarcity. 

throwing money out of helicopters would simply cause inflation since the money is not backed by a corresponding increase in producitivity or production -- hence it would be more money chasing the same quantity of goods and services. 

In sum, you cant increased societal productivity and productive capacity by simply cutting down trees and printing money.  

If you want to increase societal wealth -- it must be through increases in labor and capital production, innovation, and productivity.  And these are best attained through free markets.

In sum, money has no intrinsic value, it is only a measure of value -- when that measure has been devalued and corrupted by inflationary policies designed to create artificial wealth then the money is no longer an accurate representation of productivity, production, labor, or innovation.  -- it becomes crap or less than the value of the paper it is printed on.

 

 

Liberalism differs radically from anarchism. It has nothing in common with the absurd illusions of the anarchists... Liberalism is not so foolish as to aim at the abolition of the state.-- von Mises, Omnipotent Government

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Nice post rettoper.

"When you're young you worry about people stealing your ideas, when you're old you worry that they won't." - David Friedman
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ravochol:

" money != goods"

True.

unemployment =  unitilized capacity =  less total REAL WEALTH.

True

full employment = maximum capacity = maximum total wealth produced.

Nope. Because they could be employed in time wasting jobs.

I just had an idea.

We could reach much higher employment if we took all the people getting unemployment checks, kept on sending them the checks, but declaring they now have a job. "Check Cashers" or "Wealth Equalizers" or whatever strikes your fancy.

While we are at it, we could then give unemployment to absolutely everyone unemployed and give them the same title. We would have full employment. Would we be at maximum capacity and maximum total wealth produced?

Just admit that what "the market" means to you is the wealthy having their every whim catered to and to hell with anyone else. Admit you'd rather see people starve than offend Bastiat.

Not at all. The market makes everyone better off, especially the poor.

 

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OK, line by line refutation to the best of my ability:

ravochol:

Obviously, we have to teach some elementary economics to the geniuses who design economic policy. The basic problem we face is a lack of demand.

Big mistake right there. Big big mistake. Huge mistake. The basic problem is not lack of demand at all. 

Let us think of a Mommy who has seven children. She goes to the store and buys a full refrigerator's worth of spinach. She fills the basement and the attic with spinach as well. The whole house is oozing spinach at every pore.

But Mommy made a big mistake and the kids all hate spinach. They may eat a spoonfull or so a day, tops.

This article, and all the Keynsians, would say the house suffers from a lack of demand for spinach. We shall see what their soulution is later.

The Austrians would say that the problem is not a lack of demand NOW for spinach, but a PAST mistake in overstocking spinach in the first place. Mommy should sell the spinach [at a loss if need be] to the neighbors or whoever else will buy it, clearing up refrigerator and other storage space for food the kiddies will like.

Note that this is the exact opposite of the deficit fixation – budget deficits are a problem when we have too much demand.

No. Budget deficits are ALWAYS a problem. Always. Because they mean the govt is spending more money than it has. But the stuff they are buying with money they don't have will have to be paid for. So how can there possibly be a deficit? How do they get the sellers to sell them stuff if they are not getting paid?

The answer, of course, is that the govt is borrowing money for the nonce, the only way to spend money you don't have. But borrowed money has to be repaid, with interest. So that eventually the money will have to be found. Borrowing just pushes off the day of reckoning. Since this fellow talks about printing money, [which is going to happen, book it] we should examine the bad effects of prining money. Well we have many examples of what happens when you print money on the scope the govt will have to do to pay its debts. Enter the Dragon AKA Hyperinflation. If Mommy had troubles when the kids don't eat their spinach, what will she think when the water and electricity and heating is cut off, along with no gas for the car? Because hyperinflation makes those things [and everything else] so expensive she cannot afford them.

To better understand this demand problem, suppose that we had a super-effective counterfeiter: someone who could make near perfect copies of $50 or $100 bills. Suppose this person printed up $2tn of counterfeit money and began to spend it on all sorts of items. Our counterfeiter buys up houses and cars. They pay for incredibly lavish parties and trips. They hire all sorts of servants, groundskeepers and investment advisers.

What would be the effect of this counterfeiting scam on the economy?

In the current situation, it would provide an enormous boost to GDP

Well yes. GDP measures spending. And this counterfeiter is certainly spending. But how much you spend tells us nothing about how wealthy you are. Because you may be spending borrowed money, i.e. going into debt. So your spending, instead of indicating you are wealthy, just makes you poorer. So that the whole GDP as a measure of wealth is flawed from the outset.

Also, let's try using GDP as a measure of wealth for a community consisting of Bill Gates and a thousand poor serfs. They all live in, say, Oregon County. Bill Gates throws a huge party and spends a billion dollars on his guests, as the peons sit outside, watching hungrily.

The next day Gates boasts that he has increased the GDP of all Oregon County by a billion dollars. He is surprised that the serfs are not showing any gratitude.

Similarly, when the govt spend money [the counterfeiter in this little story] they increase the GDP of the country, but the serfs are no better off for it.

and create millions of jobs.

Huh? I don't get how.

Also, there is a big mistake thinking that indiscriminate "creating jobs" of any sort whatsoever makes people wealthier. Increasing the productivity of the nation makes the nation wealthier. Increasing the productivity of the individual makes the individual wealthier. But giving everyone an unproductive job does nothing. See earlier post about this.

After all, everyone thinks the money is real. It is no different whether the counterfeiter and his underlings spend $2tn of counterfeit money or if firms suddenly start investing their hoards of cash or households begin to spend again as though the housing bubble had never collapsed.

Yes, here he makes quite explicit his deeply flawed assumption that spending money, in no matter what fashion, is good. That's what got Mommy into trouble in the first place, spending foolishly on houses, errm, spinach.

That may sound troubling, but this is because the current economic situation is so extraordinary. In normal times, the economy is, at least partially, supply-constrained. Collectively, we want more goods and services than the economy is capable of producing. If our counterfeiter manufactured his $2tn in normal times, it likely would cause a serious problem of inflation. There would be more demand for cars, houses and other goods than the economy was able to supply. This would push up prices and wages, leading to a cycle of inflation that would persist until policy measures were taken to slow the economy –

This line is also seriously flawed, but it's not the main thrust of the article, so we let it go.

or the counterfeiter was caught.

In our demand-constrained economy, however, there is no problem of inflation. The economy can produce more of almost anything right now. The reason that we are not doing it is simply the lack of demand.

Big big huge mistake. Big big Huge mistake. The problem is an OVERSUPPLY [not lack of demand] of CERTAIN [not all] things, like houses and spinach. And the economy certainly CANNOT produce more of almost anything right now. Just because there are too many houses does not mean there are too many everythings. Please provide statistics for this. Having made all those gas guzzling cars, can GM make good cars now? Have they not wasted valuable resources making the bad cars?

But the interesting part of the counterfeiter story is that his $2tn of phony money will not create problems even in the long run, assuming that he is eventually shut down. Suppose that the counterfeiter's lavish spending gets the economy back towards full employment

He never will get the economy back toward full employment. How absurd. Because when he is buying up everything in the stores for his own needs, there will obviously be less to go round for everyone else. If, for example, the govt prints money to pay for building planes and tanks, there is less steel left to build consumer goods. So how will be there be jobs in those industries that need steel? So there will be fewer cars, refrigerators, etc etc made. How does that increase the standard of living? It doesn't. It just makes the price of refridgerators etc go up up up.

But I need not go into this. The author later admits that there is such a thing as "competing away" goods and services. He just assumes the ridiculous, that sometimes we are not producing at full capacity ALL ACROSS THE BOARD, FOR EVERYTHING, because people are too silly to want anything, the dullards.

"Oh they want stuff, they just can't afford it"

"And how did that happpen suddenly?"

"Dunno. I guess they didnt want things for some silly reason I cannot fathom, which led to unemployment, so now they cant afford it even if they want it"

Oh.

around 2012, at which point he gets nailed by the FBI who finally figure out how to recognise the dud notes.

You cannot unprint money that has been printed.

At that point, the $2tn will be grabbed out of circulation and destroyed. Assuming that the economy is strong enough at this point to remain near full employment even as this counterfeit wealth disappears, then there would be no lasting damage from the episode. The fictional wealth had generated demand when the economy needed it, but then was pulled out of circulation at the point when it could have generated inflation and "competed away" goods and services from others.

Oh, so he knows about "competing away".

While it is unlikely we will see a successful counterfeiter on this scale, the government and the Federal Reserve Board can imitate the counterfeiter's actions. This is the story of fiscal stimulus: safe, fun and legal. Instead of putting people to work filling the counterfeiter's frivolous whims, we could have them work to build up the economy and meet important needs. The list of necessary tasks is long and well-known.

Key word here is "necessary". Who decided they are necessary?

As is the case with the counterfeiter's illicit stash, the stimulus spending need not even create any long-term debt burden. The Fed could simply buy

= create inflation. Oh great, what a brilliant idea.

and hold the bonds issued to finance the spending. When the economy returns to more normal levels of employment, the Fed would raise interest rates, as it always does,

Oh/ when was the last time that happened?

to prevent inflation from posing a serious risk.

Oh so there will be infaltion, but it won't be a serious risk. Like having cancer, but not being unhealthy.

It's all very simple. Unfortunately, our Washington politicians lack the courage to take the necessary steps to get the economy back on its feet.

Yes that's true. They are too chicken too cut spending drastically.

That means that the best hope we have right now might be a very successful counterfeiter.

Or someone to educate the author of this total folly.

Dean Baker is co-director of the Centre for Economic and Policy Research

 

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Liberty student,

I'm still learning.

 

Liberalism differs radically from anarchism. It has nothing in common with the absurd illusions of the anarchists... Liberalism is not so foolish as to aim at the abolition of the state.-- von Mises, Omnipotent Government

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ravochol replied on Sat, Oct 16 2010 10:09 AM

How many more condos are needed in Florida?

ENOUGH FOR ALL THE HOMELESS PEOPLE

Except, the condos already exist - but "the market" keeps anyone without enough money out of them, and Banks are actually keeping properties OFF THE MARKET to keep PRICES UP.

Because markets don't automatically solve every problem, and often are even the root cause (like in gladiatorial combat, or in homelessness)

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