News Could Significantly Upping Defense Spending Help the Economy Recover?

[CAC1001]

Neither the town nor the county can afford to finance a multi-million-dollar project like this, and the state simply doesn't have the money to pull it off, especially while tax revenues are down. If the federal government doesn't step up, the project will never be undertaken, despite the many long-term benefits that it would provide to citizens and local businesses.

Would there be a way for the federal government to send the money directly to the town or county, or would it have to be funneled down through the state government first? If the latter, that is where I think one can run into corruption problems.

 

[turbo]

Would there be a way for the federal government to send the money directly to the town or county, or would it have to be funneled down through the state government first? If the latter, that is where I think one can run into corruption problems.

Why all the focus on corruption? Our state is populated by some pretty conservative folks and our state's elected officials are pretty open. We have never had a governor or chief legislator resign in disgrace or get indicted due to corruption charges, and there is not enough money involved in public service here to attract the creeps.

We need federal funds to get some of these projects underway because our state's finances simply can't supply the necessary money. If the feds granted a contract for a new destroyer to the shipyard at Bath, it would benefit a relative handful of people for another 4-5 years or so. Those aren't the people that are hurting here.

 

[CAC1001]

Why all the focus on corruption? Our state is populated by some pretty conservative folks and our state's elected officials are pretty open. We have never had a governor or chief legislator resign in disgrace or get indicted due to corruption charges, and there is not enough money involved in public service here to attract the creeps.

I'm talking about in general. Not all states are the same Plus government officials in general are not regarded as squeaky clean.

We need federal funds to get some of these projects underway because our state's finances simply can't supply the necessary money. If the feds granted a contract for a new destroyer to the shipyard at Bath, it would benefit a relative handful of people for another 4-5 years or so. Those aren't the people that are hurting here.

Would it benefit a handful of people, or just a handful of people in your particular area do you mean? For example I'd assume the only people in your area that would benefit would be the ones there who construct it, but what about all the parts and so forth required, I am sure that nationwide, there'd be benefits in other places too.

 

[turbo]

I'm talking about in general. Not all states are the same Plus government officials in general are not regarded as squeaky clean.

Would it benefit a handful of people, or just a handful of people in your particular area do you mean? For example I'd assume the only people in your area that would benefit would be the ones there who construct it, but what about all the parts and so forth required, I am sure that nationwide, there'd be benefits in other places too.

A relative handful of people in this state would benefit from a new destroyer contract, and those people work in south-coastal Maine - the area that has been least depressed by the poor economy.

If you're suggesting that defense spending is less-infected with corruption and deal-making than construction of highway infrastructure, I'm not convinced. If you want to build a new highway, it's going to take stone, gravel, concrete, culverts, guardrails, pavement, etc, etc. All that stuff is real and verifiable, and the contractors all know it, and when they bid on the contracts they are counting on their sources for all the materials and gauging the costs. I'd say that is a lot safer than relying on defense contractors to be above-board about costs and refrain from colluding with competing contractors.

 

[CAC1001]

If you're suggesting that defense spending is less-infected with corruption and deal-making than construction of highway infrastructure, I'm not convinced. If you want to build a new highway, it's going to take stone, gravel, concrete, culverts, guardrails, pavement, etc, etc. All that stuff is real and verifiable, and the contractors all know it, and when they bid on the contracts they are counting on their sources for all the materials and gauging the costs. I'd say that is a lot safer than relying on defense contractors to be above-board about costs and refrain from colluding with competing contractors.

I'd imagine there's probably corruption amongst defense contracting as well (although I don't know for sure, I don't see why not), and new projects can most certainly end up ballooning far beyond their initial projections in cost and so forth. That is why I only wanted money spent on replacing existing hardware that has already been developed.

When discussing corruption regarding highway infrastructure, I think it could be twofold: first, how to get the money from the federal government to the actual construction, and then possible corruption among contractors themselves.

I might be mistaken, but wasn't New Orleans for example given the money to build their levees up to withstand a more severe hurricane but never did, and thus when Katrina came through, the city flooded?

 

[Char. Limit]

One thing on the "corruption" argument...

If government is involved, corruption is massive. I'm sure it's provable, but I don't want to prove it.

 

[Antiphon]

New govt spending adds to the problem even if it's more benign like defense.

The whole world and especially the US Congress has borrowed so much money that it's now a question as to whether it can be paid back.

The world economy is a value-creating engine. When the world borrows money from it's own future but spends it on things that don't create more net money (like roads and tanks) then the future will have less money in it. That's where the world is right now, awash in debt.

The only answer is for the debt to be paid down by the wealth-creating sector of the global economy. This means governments have to reign in spending and yes, lay off workers if necessary.

This global economic trouble will be over when the global debt is paid down to between 3/4 to half of where it is now. More government spending is what created the mess. The sooner it stops borrowing, the sooner the debt can be retired.

 

[Office_Shredder]

How do roads not create money? The transportation of people and goods is a huge driving factor in the American economy.

I don't think it is at all obvious how government debt created the economic crisis. Obviously private debt destroyed companies, but most government were able to escape without much harm as far as I can tell. While the debt may (and probably will) be an issue in the future, it hasn't been an issue to this date

 

[Antiphon]

You're right it's not obvious. That's why the world isn't screaming for the debt to be paid down. The government is just another borrower, it has no special status in that realm.

The first rule of holes is stop digging the hole. Like every business and individual should know, you don't borrow money to pay bills. You borrow money when the thing you *do with the money* makes *more* money. Besides roads, the list of government spending that fits this bill is very very short.

Roads are necessary. Much of "social spending" is not. What's the payoff of paying farmers not to grow crops?

 

[mheslep]

Back at the height of the crisis / recession Martin Feldstein probably was the most prominent economist promoting this idea - increased defense spending - as the most effective way to actually stimulate, i.e. quickly recover the economy and create jobs. Feldstein was the chairman of the Council of Econ. Advisers under Reagan. I didn't like the idea, because I was sceptical of any kind of Keynesian spending if it is done solely for the purposes of economic stimulus, and now I'm more than sceptical. His article received wide review and you'll find rebuttals googling the title.

http://online.wsj.com/article/SB123008280526532053.html", December 24, 2008.

Feldstein's main point goes to addressing one of the main criticisms of stimulus spending (also made by Keynes), in that it is difficult to move the allocated government funds out into the depressed economy fast enough. See for example that large chunks of the 'Recovery' money will not be spent until 2011 or even 2012. His arguments:

• Defence spending can be fast via actions like immediate troop increases using two year enlistments that perfectly fits the time line.
• Acquire the components/materials for ship and airplane construction now, hold them in inventory until later in the construction process. Single shift production lines move to two.
• Replace the parts and munitions stocks depleted in Iraq (immediate impact).

etc.

 

[heusdens]

The typical problem with military spending is that is a waste of resources and talents, since the military production is only usuable as a destructive force, so in fact it is double inproductive.

Yet, in a capitalist society, private enterprises can still make profits out of this, not only in producing those goods, but also in contracts for "building up" the things that were with military force shot down.

We could do that in a much simpler fashion, without causing any person to be injured, I guess. Give someone a hammer and pay him for demolishing every glass window he sees. It will create many jobs, cause all those windows must be restored.

But is it usefull?

I have some other suggestions:

Built on a global scale large solar plants (Concentrated Solar Power) in areas that are threatened to become or are already desertified, that creates thousands or millions of jobs, creates cheap sources of renewable electric power that with DC lines can be economically transported thousands of miles, and can also help improving the soil beneath those plants (which get more shadow = less evaporation) and the plants themselves can use the accesss heat for desalinating salt water into drinking water for (drip) irrigation, so you can turn the soil into agricultural land in the course of time.

More land to feed the hungry, many jobs for poor nations that need economic development, and plenty of renewable electric energy at affordable prices (which can be used also to electrify car transporation and help us get off oil).

Why not?

See also (Google on those keywords)
- Plans of Desertec EU-MENA to install CSP plants in North african desert and the Middle east
- Plans of sub-saharan africa to create a green zone to fight desertification extending from Senegal in the west to Ethiopia in the east.

 

[AlexES16]

The idea is to create jobs on a large scale, I don't think that would quite do it.



How will spending money on waste-handling or recycling stimulate the economy?



The technology doesn't exist yet.



It's to be temporary spending, healthcare is permanent spending. Also, healthcare spending isn't going to create jobs as I see it. Finally, people could afford to buy their own healthcare fine if government would apply some of the means to fix the private-sector healthcare system I'd think.



How is providing for the national defense not useful?

Tipic Capitalist thinking

 

[hagopbul]

as long as there is a privet arms companies the economy want be healed

 

[Char. Limit]

as long as there is a privet arms companies the economy want be healed

The economy does not want to be healed. Economies are not sentient, and therefore do not want.

 

[brainstorm]

To me the point of economics isn't to keep people busy, but consumption-driven job-creation economics seems to be about little more than that. Military activity has throughout history provided people (usually men) with organized labor, discipline, and conflict to keep them busy (or reduce their numbers - either as "collateral damage" or probably intentionally at times). It also has the function of promoting freedom by repressing the abuse of freedom. In other words, if people are unemployed or underemployed, they're less likely to misbehave (engage in criminal or terrorist activities, for example) if there is a military or police threat of retaliation.

Repressing freedom through military and police actions probably has positive as well as negative effects but the issue is how this method of regulating freedom compares with job-creation and consumption-driven economic discipline. Is it better to keep people occupied in consumption-driven servitude so they won't misbehave or allow them more freedom but police them militarily against abusing it?

 

[CRGreathouse]

You're right it's not obvious. That's why the world isn't screaming for the debt to be paid down. The government is just another borrower, it has no special status in that realm.

It has a very special status: it can print its own money.

 

[mugaliens]

It has a very special status: it can print its own money.

Not without diluting it's value...

 

[talk2glenn]

It has a very special status: it can print its own money.

This is a pervasive myth.

The government cannot "print" money - it can confiscate it (taxation), or borrow it (bonds).

If governments cannot find willing lenders to purchase its bonds, it can combine the two schools, forcing anyone who holds its currency to lend it cash. This is what we are talking about when we refer to "printing money" - if the government expands the money supply by 10%, it has effectively borrowed 10 cents out of every dollar previously in circulation.

Governments do this when they lack the resources or authority to effectively collect the 10 cents through direct taxation (transitory and/or weak governments, predominantly).

The only difference between issuing new currency and issuing bonds is consent.

 

[mheslep]

This is a pervasive myth.

The government cannot "print" money - it can confiscate it (taxation), or borrow it (bonds).

If governments cannot find willing lenders to purchase its bonds, it can combine the two schools, forcing anyone who holds its currency to lend it cash. This is what we are talking about when we refer to "printing money" - if the government expands the money supply by 10%, it has effectively borrowed 10 cents out of every dollar previously in circulation.

Not necessarily. The value of the dollar is set on a world market, based on several factors including the US GDP, balance of trade, and the outstanding debt of the government. If the US economy grows (GDP grows) by X without an corresponding increase in debt, then the government can simultaneously circulate more dollars without decreasing the value of the dollars held be the public.

 

[talk2glenn]

Not necessarily. The value of the dollar is set on a world market, based on several factors including the US GDP, balance of trade, and the outstanding debt of the government. If the US economy grows (GDP grows) by X without an corresponding increase in debt, then the government can simultaneously circulate more dollars without decreasing the value of the dollars held be the public.

You're on the right track, but you're missing a key point.

If gdp grows by x without any corresponding change in # of $s, then fewer dollars are chasing more production. This is what we call inflation.

If government expands the money supply at a rate equal to the rate of change in gdp, it returns the currency to its prior value, effectively borrowing the difference.

Sorry I am typing this on a mobile phone.

 

[mheslep]

If gdp grows by x without any corresponding change in # of $s, then fewer dollars are chasing more production. This is what we call inflation.

No! More dollars chasing the same production causes inflation. Fewer dollars with stagnant production causes deflation as in the Great Depression, when the Fed collapsed the money supply and dragged production down with it.

 

[CRGreathouse]

The government cannot "print" money - it can confiscate it (taxation), or borrow it (bonds).

Obviously this is false! The BEP can (and does) literally print money.

But speaking realistically, the Fed can purchase bonds, as many as desired (well, up to the $13 trillion outstanding), thus increasing the money supply.

And now that Bernanke is talking about the possibility of using "unconventional measures", there are other things that might be done...


I'm not sure what your statement is trying to get at, since on the face it's clearly wrong. Perhaps you were speaking to the separation of fiscal and monetary policy?

 

[mugaliens]

This is interesting! (eats more popcorn)

 

[talk2glenn]

No! More dollars chasing the same production causes inflation. Fewer dollars with stagnant production causes deflation as in the Great Depression, when the Fed collapsed the money supply and dragged production down with it.

You are correct! I should have written "deflation" not "inflation". My fault for hammering these things out in a rush from my cell phone.

Obviously this is false! The BEP can (and does) literally print money.

Obviously you are still incorrect in this point CR! Repeating it does not change the fact. Money has no "instrinsic" value - it is just paper with numbers and pretty pictures.

The value comes from its legal use as a placeholder of production value in an economy, principally, and from its scarcity in the currency markets, marginally.

Printing new currency does not create any new value - it borrows existing value from the money already in circulation. Hence the point that government, like any other entity, can acquire capital in only two ways: confiscation and borrowing.

 

[CRGreathouse]

Obviously you are still incorrect in this point CR! Repeating it does not change the fact. Money has no "instrinsic" value - it is just paper with numbers and pretty pictures.

You're the one talking about value, I was talking about money.

Printing new currency does not create any new value - it borrows existing value from the money already in circulation.

Yeah, that strawman sure was wrong.

 

[WhoWee]

While it's important to keep people from falling into poverty (extension of unemployment benefits comes to mind), it is far more important to provide enough stimulus to create jobs. That's why I would like to see lots of large highway infrastructure projects financed. Not only do people get jobs and paychecks, when they spend that money, other people get jobs, more hours at their own jobs, and more pay. Finance a multi-year project to replace a crumbling bridge and you not only employ all the people responsible for planning, engineering, and building the bridge, but the money they and their families spend employs pizza-makers, hairdressers, filling-station operators, salespeople... it goes on and on. The fact that such projects can happen all over the country make them a nice option, as opposed to highly-concentrated defense spending. Maine has Bath Iron Works (shipyard) and some facilities that make gas turbines for the military, but our state's economy would be far better-served by upgrading roads and bridges all over the state.

We have lost sawmills and paper mills in the economic downturn, and the tourism sector is suffering badly, as is commercial fishing. An infusion of construction jobs would not only help stimulate our local economies; the improved infrastructure would position our industries well for a (hoped-for) coming bounce.

I think too much emphasis is being placed upon the infrastructure vs defense debate. If you step back and look at the parts of the economy that are suffering (as Turbo pointed out) it's small businesses.

I think an effective "stimulus" plan (at this point) would be to redirect all of the unspent "stimulus funds" over to the Small Business Administration - and let them fund/re-finance small businesses. An expansion of small business will create direct jobs, create construction and supply jobs - and create tax revenues.

 

[lisab]

I think too much emphasis is being placed upon the infrastructure vs defense debate. If you step back and look at the parts of the economy that are suffering (as Turbo pointed out) it's small businesses.

I think an effective "stimulus" plan (at this point) would be to redirect all of the unspent "stimulus funds" over to the Small Business Administration - and let them fund/re-finance small businesses. An expansion of small business will create direct jobs, create construction and supply jobs - and create tax revenues.

That would be helpful. I'd especially like to see the SBA focus on manufacturing, but I'm not sure they can do that legally.

 

[Galteeth]

People get so disconnected from the basic economic realities.

Example: I recall reading a post somewhere complaining about illegal immigrants. It said something like "They do the work for less money, and the money they make, they're not spending it here. It's getting sent back to Mexico. That doesn't help the US economy at all."

That situation, if you think about it for about two seconds, is an enormous benefit to the US economy. Someone is doing labor (which there is obviously some demand for) and getting very little in return. If you think about in terms of what the individual inputs to the US economy versus what he extracts, it's clear the value he's adding to the US economy is MORE then that of a US citizen.

It is the keynesian notion that economies are driven by demand that leads to this muddled thinking.

Plenty of people in plenty of countries want plenty of things (like say, food or medicine) but the "greater demand" doesn't mean those economies are in better shape.

Ok, now, military spending can provide benefits to a country in a few ways. There is obviously the defense benefit, and also the resource acquisition leverage. But just building bombs and tanks and blowing them up isn't any more economically beneficial then digging a hole in the ground and re-filling it (in fact, from an energy and material point of view, both are wasteful).
Yes, some people might acquire skills that later prove to be useful. And some machinery or technology may be developed that will also have unforseen beneficial uses. But this is just about as likely to happen with any sort of large scale government industrialization project.
People look at WW2 as an example of how military spending benefited the country; I would argue that it did, but because of the position that the USA found itself in with regards to the rest of the world (essentially the last industrial nation standing and the holder of the reserve currency through bretton-woods).

Just producing more "things" does not mean an economy is "better."

 

[SixNein]

So I've been thinking, many on the left say we need massive economic fiscal stimulus to recover the economy. They say the reason fiscal stimulus hasn't worked in the past is not enough money spent.

However, they say WWII represents a time when the nation finally did spend the massive amount needed. Also the Reagan recovery. I know Republicans point to things like Reagan's tax cuts and deregulation, but Reagan also upped defense spending significantly. So could Reagan inadverdently have given a Keynesian-style economic push to the U.S. economy as well?

One thing I have been reading on military forums (I do not have any official source on this however) is that a major problem with the U.S. military's vehicles, such as Humvees for example, is that:

1) They were never meant to be driven the distances they have been used in Iraq and Afghanistan

2) They were never meant to be fitted with all that armor they have tacked onto them, which strains the engines and transmissions and causes blown transmissions, parts wear out far faster, etc...basically a lot of the military's equipment, or at least the Army and the Marine Corps's, is getting very worn out far faster than was ever intended.

Now Paul Krugman wrote an article in the New York Times (http://www.nytimes.com/glogin?URI=http://www.nytimes.com/2010/06/28/opinion/28krugman.html&OQ=_rQ3D1&OP=298494f8Q2FQ5D3vwQ5DFQ3EQ60LGQ3EQ3EHWQ5DW)Q24)Q5D)Q2AQ5DWQ5EQ5DQ3EXdKdQ3EKQ5DWQ5E5GAEkCK@Q23Hko - you'll need an account there to read it though), discussing how he thinks we are on the verge of another depression, and that the worst thing to do now is cut spending, and he laments that is what Europe wants and what seems will start happening in America.

He says that yes, Greece is a major example of what happens with long-term deficits and debts, but in times of economic crisis, short-term deficit spending is good.

So my question is, would not upping defense spending a good deal be perfect for this scenario? Think about it:

1) It seems to have really worked at creating jobs in the past (WWII, Ronald Reagan)

2) Assuming the military's vehicles are worn out, the military, in particular the Army and Marine Corps, could really use it to a degree (new vehicles, like Humvees).

3) It would be short-term. Unlike stimulus spending that goes into bloated state bureaucracies or feeding demands of public employees unions or entitlement programs certain people in government want to create (which are impossible to end once began), you spend a bunch of money to replace worn out military hardware with brand-new military hardware, and then once done, you have no problem drawing down spending.

I am sure you'd have to fight to even sustain it for the length one might feel is needed. You just make sure the new vehicles will not require any substantially higher defense budget once replaced (if anything, if they have new parts that are easier to maintain, the budget might be able to be a bit less).

But for example if building the Air Force all the F-22s it wants would mean a substantially higher budget for the Air Force to maintain the F-22s, then one would probably need to be careful there I'd think (I have no clue if the F-22 is cheaper or more expensive to maintain then the F-16s and F-15s).

So such deficit spending on defense would be a short-term form of deficit spending, just as the Keynesians want, according to them it has worked in the past (WWII) (I can't imagine how it would not create lots of real jobs), and the military likely needs it right now (correct me if wrong).

What say you people?

1-2-3) The United States gained economic advantage after world war two because the rest of the world's industry was in rubble. The defense spending in and of itself had nothing to do with the economic boom enjoyed by the United States after world war two. The economic impacts we have enjoyed directly from defense spending came mostly from the redirection of the monies being put into funding scientific research and development. So why not just cut out the middle man and fund scientific research and development directly?

To be honest, I'm not sure there is any easy ways out of the present situation. I think the United States is in a great deal of long term trouble, and I do not have any quick fix suggestions. The only thing I am certain about is that Americans are going to be changing their lifestyles.

The problem as I see it has to do with globalization and production. When I look at the balance sheets of companies, most of them seem to be doing very well. But when I look at the general population, I see a completely different trend. So I think we may be seeing a new type of over-production that has been fueled by credit. Companies are currently producing more than people can afford, but it has been hidden by credit. Instead of the over-production effect being seen at the production level, it has been shifted to finance balance sheets and housing markets. Now that the credit has been completely consumed, governments are trying to step in and continue buying the overproduction.

And the end of the day, I think the effect has been mostly caused by globalization. America has lost a large portion of its industry through outsourcing, and the jobs that have not been outsourced have been reduced due to efficiencies created through technologies such as the computer and internet. Many people have lost their jobs or took pay cuts, and they have continued their lifestyle through credit. So where we go from here seems to be an open question.

Personally, I don't think the market can adjust until we go through a cycle of deflation.

 

[SixNein]

Well sure plenty have been saying that, but people have been claiming this for years. I am no expert, but the subject of peak oil is a complex one that involves many variables. For example, I think scientists right now say there are about three trillion recoverable barrels of petroleum out there, and so far we've taken around one trillion. Some believe there could be as much as ten trillion out there.

But even if there's about three trillion, there's issues like technology, economic growth, etc...that come into play.

Then there's natural gas, there's shale oil and tar sands (which are expensive and difficult to get to, but I am sure in time the technology, especially if necessary, would make it easier and more profitable, and if petroleum ever does start coming in shorter supply, it's increasing price will make shale and tar sands profitable).

There's also coal. The United States alone is a Saudi Arabia of coal, and you can convert coal into oil.

So I highly doubt fossil fuels will run out soon, although finding a replacement to significantly reduce our usage of them is something we very much want to do. But the fact is that solar and wind power just are not going to do it right now.

When scientists talk about peak oil, they are not talking about the amount of oil in the ground; instead, they are talking about oil that can be easily accessed. Traditional oil wells have been such that people can simple drill down and pump it out. Peak oil is referring to those easy to access oil wells. After those as gone, oil becomes a great deal more challenging and expensive to extract. An example would be extracting oil mixed with sand. Another example would be extracting oil that is in puddles under the ground spread out over a large area at variable depths.

Even if there is still plenty of oil in the ground, can the oil be extracted at a rate necessary for keeping the production levels anywhere near current level? Personally, I don't think it is realistic to assume that it can be done.

 

[jduster]

Deficit spending on anything, in a Keynesian view, would stimulate the economy.

Whether it is for defense spending, education, science, or to build a 6,000 ft. pyramid.

I agree this nation needs a strong national defense and is better off with a few defense spending increases, but the defense budget is already rife with waste and does not need a "significant" upping.

 

[mheslep]

People get so disconnected from the basic economic realities.

Example: I recall reading a post somewhere complaining about illegal immigrants. It said something like "They do the work for less money, and the money they make, they're not spending it here. It's getting sent back to Mexico. That doesn't help the US economy at all."

That situation, if you think about it for about two seconds, is an enormous benefit to the US economy. Someone is doing labor (which there is obviously some demand for) and getting very little in return. If you think about in terms of what the individual inputs to the US economy versus what he extracts, it's clear the value he's adding to the US economy is MORE then that of a US citizen.

Do you have any sources totaling up the costs of illegal immigration?

Just producing more "things" does not mean an economy is "better."

How do you define better then? I'd argue that in a true free market, yes producing more things is on the whole to the good as only things that people need or want get produced.

 

[Galteeth]

Do you have any sources totaling up the costs of illegal immigration?

How do you define better then? I'd argue that in a true free market, yes producing more things is on the whole to the good as only things that people need or want get produced.

I was given a specific example in reference to one quote on a particular pattern of behavior. Under the parameters defined (where the immigrant is working at a lower wage then americans and is sending most of their money back to relatives in Mexico, an important caveat is that this money is then being used to buy mexican made goods, not importing american goods) then clearly this immigrant is a "benefit" to the US economy. The situation changes if the immigrant is actually receiving other benefits from the American economy (like health care, or education or what not). The point was not to argue about immigration, but to illustrate how some odd assumptions that are common in economic thinking can lead to absurd conclusions.

I would say that the relative health of an economy has to do with the standard of living of its members. Accepting your point about a free market, we then have to ask if increasing military spending (which would obviously not be a free market action) would then lead to more production on the free market (which you think it would.) The other outcome would be that such investment would instead be a drain on the free market (i.e., resources that could have gone into free market production are being used in military production).

My point was to try and express my frustration with what I was calling the Keynesian economic thought process. Let me give you a different example to make the point.

Suppose we have a society of about 100 people. About ten of these people have some useful school (farmers, doctors, what not.) The rest do not, and are being supported by the other ten. Nobody's crazy about this situation. So someone decides on a stimulus plan. The 90 people are going to be employed digging holes and then filling up. Well, now these people are "earning" their keep. Perhaps the labor will condition their bodies to be better at farm work. And perhaps some tools have to be produced to get the digging done, which later on (once the hole digging stops) have practical use in agriculture or something.

But at least in the short term, these 90 hole diggers might be a greater drain on the ten producers then otherwise. With greater work, they might have a higher caloric intake required then before, requiring the farmers to produce food. Also, their might be more injuries in the hole digging process, requiring more medical work. Assuming these things are true the society was better off from a standard of living pov, before the stimulus was enacted. This is especially true if say, it turns out that some land that might have been suitable farm land has to be used for hole digging.

To make it a little less silly, let's say that the holes are being dug to get at some useless rocks (Usocks). So even if the society is producing more usocks, if nobody has any use for the usocks, the society is poorer, and I would argue, the economy is worse. Even if they passed a law that say, people had to eat the usocks, still same situation.

 

[mugaliens]

When scientists talk about peak oil, they are not talking about the amount of oil in the ground; instead, they are talking about oil that can be easily accessed. Traditional oil wells have been such that people can simple drill down and pump it out. Peak oil is referring to those easy to access oil wells. After those as gone, oil becomes a great deal more challenging and expensive to extract. An example would be extracting oil mixed with sand. Another example would be extracting oil that is in puddles under the ground spread out over a large area at variable depths.

Even if there is still plenty of oil in the ground, can the oil be extracted at a rate necessary for keeping the production levels anywhere near current level? Personally, I don't think it is realistic to assume that it can be done.

You've nailed it - this is what peak oil means, that beyond a certain point, there may yet way more in the ground than we've yet taken out, but it's in forms which are not easily extracted, not only with current technology, but also with foreseeable future technologies as well.

Peak oil is where production simply cannot keep up with demand. Nothing more, nothing less. Beyond peak oil, production declines while demand skyrockets.

They key to getting beyond peak oil is to ensure our suite of energy production technologies no longer requires oil, and well before we get anywhere close to peak oil in 2017.

Like around 1997. That would have been a good target date. :(

 

[WhoWee]

Maybe we should have the military take over building of the fence on the Mexican border and equip it with the latest Solar and Wind technologies - coupled with guard towers and soldier barracks, helicopter pads, and Drone facilities.

The Government could discount energy prices and still realize a (GASP!) Return On Investment.

 

[talk2glenn]

My point was to try and express my frustration with what I was calling the Keynesian economic thought process. Let me give you a different example to make the point.

That example was not Keynesian.

Keynesian stimulus theory calls for government receipts to increase at the same rate as an increase in private savings during recessionary periods. That is, if consumers reduce their personal consumption by 10%, government should increase its consumption by 10%, so that the net effect on GDP is zero (GDP being defined as private consumption + government consumption + exports - imports).

It does not advocate that the government buy useless rocks; it says that the government continues to buy things it already values, just more of them.

In your usock example, you are proposing a national production plan as a form of economic stimulus. This is not a Keynesian perspective. There are no economists who would suggest that the government directly increase production of some arbitrary goods as a form of economic stimulus. As you rightly point out, production is only useful to the extent that someone voluntarily consumes final products at reasonable prices, and if the government has to subsidize production, it is because (by definition) there is insufficient demand for the good at the amounts produced after intervention at market prices, and the market is operating at a loss (inputs > outputs). Further, recession is caused by insufficient demand for final goods, never insufficient production - there would be no conceivable benefit to the state stepping in and further increasing output through national industries during such periods, and this is why command economies tend to respond poorly to the market cycle relative to market economies.

Keynesian theory calls for consumption stimulus, never production stimulus.

 

[mheslep]

That example was not Keynesian.

It does not advocate that the government buy useless rocks; it says that the government continues to buy things it already values, just more of them.

Could you provide a source for this?

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

http://books.google.com/books?id=dQ...d up to the surface with town rubbish&f=false

 

[CRGreathouse]

I feel the need, right about now, to mention the broken window fallacy.

 

[mheslep]

I feel the need, right about now, to mention the broken window fallacy.

Yes that is the suggested flaw in the Keynesian theory, and I don't give Keynesian stimulus much credence now, but I thought it should be at least be stated as originally given.

 

[rootX]

Yes that is the suggested flaw in the Keynesian theory

Keynesian does not work always as it should because government fail to respond within appropriate time sometimes not because it always crowds out the private investment.

 

[CRGreathouse]

Keynesian does not work always as it should because government fail to respond within appropriate time sometimes not because it always crowds out the private investment.

That's certainly what a Keynesian would say, yes.

 

[talk2glenn]

Could you provide a source for this?

I'm usually not a fan of doing the research of others; properly defining an elementary economic theory should be the claimants job, not mine. But...

http://agonist.org/stirling_newberry/20081115/how_keynesian_stimulus_works

"This conclusion, that economies can stabilize after a shock at a lower level of production was his reason for calling for "priming the pump" stimulus: spending which would encourage people not to defer purchases, or businesses not to defer investment based on fears about the economy."

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

This reinforces my point. Keynes is providing an extreme example of government consumption of excess currency, specifically the government consumes it by burying it in the desert. The market then assumes the onus of production by organizing labor to the productive pursuit of digging it up.

Clearly, we can all see that this proposal is metaphorical, not practical?

I feel the need, right about now, to mention the broken window fallacy.

The broken window fallacy is an argument about efficiency of outcomes, and is used to address the claim that war is economically productive, independent of defense spending.

To be fallacious, the argument assumes the homeowner would have spent his money productively had the window not been broke. Keynes would respond that during a recession, the capital is by definition saved, not spent. Therefore breaking the homeowners window (a metaphor for forcing capital to be put to work) is more productive than the status quo, but certainly less productive than alternatives.

 

[CRGreathouse]

This reinforces my point. Keynes is providing an extreme example of government consumption of excess currency, specifically the government consumes it by burying it in the desert. The market then assumes the onus of production by organizing labor to the productive pursuit of digging it up.

Emphasis added.

Can you explain?

 

[mugaliens]

Maybe we should have the military take over building of the fence on the Mexican border and equip it with the latest Solar and Wind technologies - coupled with guard towers and soldier barracks, helicopter pads, and Drone facilities.

The Government could discount energy prices and still realize a (GASP!) Return On Investment.

Interesting idea. In the days of old, members of the military were expected to do nearly all the work of repairing and maintaining their equipment, including scraping rust and barnacles, painting, cutting grass, sweeping/cleaning/mopping/polishing... Going through basic or OT schools, that's still done, but these days it's largely contracted out once you hit your operational units. I do not buy into any "savings" involved, as these work details largely used additional time available to servicemembers not spent elsewhere in training or operations.

One of the issues I see with your idea is that of community creep. That's what we call what happens when the military builds a base way out in the middle of nowhere, only to find dozens of businesses and services springing up just outside the gates who provide services from dry-cleaning to eateries to dining room furniture to the servicemembers and their families.

I think drones provide exceptional value, covering vast expanses of terrority at a fraction of the cost of dedicated ground troops, while allowing roaming patrols to conduct the pickups. If there's a large breech at one point, helicopters can deliver a force of troops with more than enough numbers to round them up.

Both the drones and the air assault forces can be housed away from the border, in more hospitable areas, while still being able to conduct patrols and respond as required to keep our borders secure.

 

[Galteeth]

I feel the need, right about now, to mention the broken window fallacy.

This was basically what I was trying to express.

 

[jduster]

Increasing defense spending should only be done for national security reasons, otherwise it becomes a broken window fallacy. Sure, we could spend $400 billion dollars on defense spending that isn't vital to the country, but that money could be spent in much better areas such as medicine and education.

 

[mheslep]

I'm usually not a fan of doing the research of others; properly defining an elementary ...

You mean classical. I think you'll be hard pressed to find a economics text saying Keynes' A General Theory ... is elementary.

... economic theory should be the claimants job, not mine. But...

I didn't ask you per se about a working definition of Keynesian theory or to provide condescension; I asked for a reference in accordance w/ PF guidelines about your statement:

It does not advocate that the government buy useless rocks; it says that the government continues to buy things it already values, just more of them.

Instead, you provided an agenda blog site as a reference and side stepped the question by posting something that says nothing about what the government should buy.

This reinforces my point. Keynes is providing an extreme example of government consumption of excess currency, specifically the government consumes it by burying it in the desert. The market then assumes the onus of production by organizing labor to the productive pursuit of digging it up.

Clearly, we can all see that this proposal is metaphorical, not practical?

The example is narrow or marginal, not metaphorical. Burying money only to be dug up qualifies as an attempt at demand side stimulus, but would have no other utility.

 

[talk2glenn]

You mean classical. I think you'll be hard pressed to find a economics text saying Keynes' A General Theory ... is elementary.

Classical? Really? You do realize that Keynes is considered the father of the anti-classical movement in economics? One might as well call Einstein a classical physicist. Under classical economic theory, the market was expected to be self-correcting towards long run equilibrium, through cyclical volatility.

The Depression demonstrated practically - and Keynes theoretically - that while this was technically true, the new equilibrium level could be below the pre-recession output level, due to the permanent removal of production capacity from the market in response to the decline in consumption and investment. Keynes took it one step further - he argued that the market may be prevented from naturally reaching any equilibrium, lower or otherwise, by price inflexibility (for example, worker unwillingness to take additional pay cuts, or consumer unwillingness to purchase rather than save at any price due to their individual long-run concerns). This flies in the face of the basic assumptions of classical economic perspective - the so-called invisible hand.

I meant elementary in that it is taught in ECN 101.

I didn't ask you per se about a working definition of Keynesian theory or to provide condescension; I asked for a reference in accordance w/ PF guidelines about your statement:

My statement was an accurate, working definition of Keynesian stimulus. It is not reasonable to misrepresent Keynes and then claim that by attacking this straw man you've said anything useful about one of the central tenets of modern economic theory.

Instead, you provided an agenda blog site as a reference and side stepped the question by posting something that says nothing about what the government should buy.

Agenda driven? I'll admit I linked to the first Google link I followed which provided a simple, non-technical explanation of the theory. Regardless, this strikes me as attacking the messenger - you have any technical complaints with the content, other than the fact that it disagrees with your own (erroneous) interpretations?

The example is narrow or marginal, not metaphorical. Burying money only to be dug up qualifies as an attempt at demand side stimulus, but would have no other utility.

I feel silly having this discussion. This is the risk academics take when they use metaphor and simple hypothetical narrative to impart complex ideas. Keynes was not seriously suggesting that the government bury money as a form of fiscal stimulus. He was making a point. That point is, "demand creates its own supply" - the best way to insure a constant level of production in an economy is to maintain consistency of demand. By injecting additional currency into the market during periods of increased savings (recessions), the market will naturally organize labor to the productive pursuit of receiving that currency for services rendered (ala, digging it up).

Practically, Keynes argued for infrastructure spending and (to lesser effect but still desirable) interest rate spending as the mechanisms most likely to produce an efficient, desirable effect (specifically, that the government should build roads and bridges and buy down the interest rate through intervention in the loanable funds markets).

There are reasonable arguments against Keynesian theory (specifically, the Austrian and American economic schools take issue with some of his claims, particularly price inelasticity), but to suggest that he would advocate that the government get into the business of quarying useless rocks and then force people to buy them (a collectivist economic approach, clearly) is not reasonable.

 

[mheslep]

My statement was an accurate, working definition of Keynesian stimulus.

Says who? Support it with a reliable reference.

It is not reasonable to misrepresent Keynes and then claim that by attacking this straw man

What are you talking about? I've proposed nothing, thus no strawman.

https://www.physicsforums.com/showthread.php?t=414380

 

[mugaliens]

Practically, Keynes argued for infrastructure spending and (to lesser effect but still desirable) interest rate spending as the mechanisms most likely to produce an efficient, desirable effect (specifically, that the government should build roads and bridges and buy down the interest rate through intervention in the loanable funds markets).

And until a couple of yeas ago, this was, more or less, the approach we took.

There are reasonable arguments against Keynesian theory (specifically, the Austrian and American economic schools take issue with some of his claims, particularly price inelasticity), but to suggest that he would advocate that the government get into the business of quarying useless rocks and then force people to buy them (a collectivist economic approach, clearly) is not reasonable.

You're right. Infrastructure spending only works, and I mean only, as a means of improving the economy, when the projects upon which the funds are spent have a direct, or nearly direct, and significant and positive impact on one or more key aspects of the economy. Good transportation is one of those aspects, or rather, the effect it would have on our economy if it weren't good, is one of those aspects.

Traffic jams, for example, including those caused by repairing both sides of the road simultaneously, don't make for efficient deliveries. What costs the transportation companies winds up costing the consumers. But we can't afford to create an infrastructure so expansive that it eliminates all traffic jams. That's a luxury, not a utility.

There appears to have arisen this idea that spending is a means of solving our economic issues. That idea is fundamentally flawed, and leads to the temptation and action of increasing spending not because the target is worthwhile, but simply because of the flawed premise itself.

This has the potential for huge wastes on non-essential programs, void of return on both those programs as well as the economy. The only solution is to ditch the flawed premise, and stop spending as a means of improving the economy. That's a pipe dream.

Instead, if any spending is done, it should be based on both the project's inherent worth and value, but within budget - always within budget. And that includes making serious payments on the principle behind the interest!