What Is this "Stimulus" Nonsense?
I'm no economist. So maybe I shouldn't post articles about economics. On the other hand, I'm pretty sure that the politicians running the government, as well as the average voters who put them there, know a lot less about economics than I do. I'm not sure they're listening to any actual economists either. So I'm not inclined to trust them when they say that we need economic stimulus from the government.
I hear on the news that Congress has just agreed to a $900 billion "stimulus package" to help with the Coronavirus-induced recession. So here's my question: how does this make any sense?
Consumption and Production
It appears that almost everyone believes this economic theory: The cause of economic prosperity and growth is consumption. It's bizarre to me that this is received wisdom among both the masses and the elites, because it's such a flagrantly counter-intuitive theory. Prosperity consists of having more stuff of value (goods and services) available. Therefore, intuitively, the root cause of prosperity must be production, not consumption. Using stuff up does not make you rich. No one would think that in their own lives. But they think it about the society as a whole.
Implications of this theory: if we just get people to buy a bunch of stuff, the economy will improve. On the other hand, if you're saving your money, a.k.a. "hoarding", you're being bad and anti-social. Also, if the government prints a bunch of money and then spends it, or gives it to us to spend, then we'll all be richer.
I think this is all basically the opposite of the truth. Maybe it's because I don't think that wealth consists of dollar bills or numbers recorded in bank accounts. I think wealth consists of goods and services of value, and dollars are just tools for exchanging the things of actual value. Having money means that you did something of value to others, and you're thus entitled to get some things of value in return. If you have money and you don't spend it, that means that you gave value to society and did not take stuff of value in return, so you left more for others. That's the opposite of anti-social behavior.
There's a deep insight in Say's Law. Supply is the basis for demand. The "demand" for widgets, in the economically relevant sense, is the amount of value that people are willing to give in exchange for widgets. The amount of value that people are willing to give in exchange for things is, in general, determined by the amount of value that they themselves produce. Thus, the demand for all goods and services, taken together, equals the supply of all goods and services, taken together. And that's because the supply creates the demand, not vice versa. I'm under the impression that most people (including politicians) have never heard of this idea.
By the way, notice that I'm not saying "supply creates demand" in the sense that all you have to do is make some product and people will start wanting it. That's dumb, and nothing to do with Say's Law.
Maybe people miss points like this because they are stuck thinking of money (e.g., dollars) as wealth. The demand for widgets, fundamentally, isn't the number of dollars people are prepared to trade for widgets. The demand for widgets, fundamentally, is the amount of value they are prepared to exchange for widgets.
So if we want there to be more demand, what we have to do, fundamentally, is increase production. For example, get people to work more, or more efficiently, or reduce costly regulations.
Where Does the Money Come From?
I used to argue with people on the internet about "stimulus". When I did, I repeated the following argument over and over, and the stimulus-mongers would just completely ignore it every time.
When the government increases its spending -- or when it gives a check to consumers, like they're about to do now -- that money comes from somewhere. Generally speaking, if it's a "stimulus" plan, they won't want to raise taxes, so what they'll do instead is borrow money.
What does that mean? It means the Treasury issues some bonds. Individuals buy the bonds, and the government then has money to spend.
Okay. How did the individuals buy the bonds? With . . . money. So the amount of money that the government is spending is equal to the amount of money that they took out of private hands. So they're not increasing the amount of money that people have to spend (unless the Fed prints more money, but that's not up to Congress) -- they're just moving it around.
So the argument can't be that we need stimulus to put more money in people's hands. The argument would have to be that we need to temporarily redistribute the money that's in citizens' hands. ("Temporarily", because the state is promising to pay back the bond holders later.) Take some of the money from investors who are willing to buy Treasury bonds, and move it to some average Americans.
But why think that the money is going to do more good in the hands of random consumers than in the hands of the investors who buy Treasurys? The investors would probably have spent that money on some other investment (corporate bonds, stocks, CD's, etc.). The random consumers will probably spend it on some random consumer goods. Why would we think that putting more resources into random consumer goods is better for the economy than putting resources into investment?
The Covid Stimulus Is Doomed
That was my general complaint about "stimulus". Maybe you don't agree with it. Maybe I'm crazy, since so many people seem to agree with stimulus spending. But be that as it may, even if you think that stimulus spending can work in general, it's a particularly dumb solution to the Covid-19-induced recession.
The reason the economy is going down right now is not that people don't have enough dollars in their pockets. It's not that people's demand for cash is too high so they're hoarding, nor is it that consumers are afraid to spend. We know exactly why the economy is going down: it's because of the Covid lockdowns. It's because the government is stopping people from going to work.
Wealth comes from people working. That's a fundamental point to get about the economy. If you stop people from going to work, then the economy stalls. Nothing else prevents that, unless you let people go back to work. You could give everyone a million dollars, and it wouldn't help anything if people still aren't allowed to work. The prices of everything would just have to skyrocket, and we'd still have the same amount of stuff of value.
Redistribution?
Maybe I was uncharitable. Maybe the idea behind the Covid-19 "stimulus" is not really to stimulate the economy (despite that the media are all calling it a "stimulus"). Maybe the point is actually just redistribution. Maybe, in the short term, the government is just trying to redistribute resources from wealthy people (who are likely to buy Treasurys) to relatively poor people (who won't), because the latter simply need the money more.
Okay, that could be rational, from a utilitarian point of view. (Let's ignore issues about rights.)
Let's all just keep in mind, though, that this is only a near-term redistribution. In the long term, the redistribution is in the reverse direction. The investors are only buying the bonds in the first place because they're going to get back more money later. And that money is going to have to come from the taxpayers in general.
I'd be more convinced that Congress knows what they're doing if they weren't calling this a stimulus, and if they just said, "Hey, we're going to temporarily redistribute from relatively wealthy people to average people, with a promise to later redistribute in the opposite direction." As it is, I'm not sure that the Congress, or the media, or the voters know that this is what they're doing. I suspect they think they're getting a magical free lunch.