Another Schroeder interview

[RichardGibbons]

Ben, Ken Fischer was the source of the 6x statistic.  I quoted it so that I wasn't just making a political rant, but actually backed it up with some evidence and reasoning.  It's irrelevant whether Ken Fisher is a genius or a baboon, as long as he can quote economic findings correctly.  (After reading one of his books, I'd tend to agree more than disagree with your assessment of Ken Fisher.)

 

Second, you missed the point.  Mortgage money, after it is spent the first time, is the same as government money after it is spent the first time, is the same as private industry money after it is spent the first time.  I used the phrase "mortgage money" because that was what economists looked at. 

 

The whole point was that if someone spends $1, even if it's spent "unwisely", after that the money is spent by the private market 5 times.  The government spends $1 on booze. The liquor store spends it on beer and employees.  The beer manufacturer spends it on employees, hops, real estate etc.  The employees spend it on food, stereo systems etc.

 

In effect, it's saying that it makes absolutely no sense to say that government spending is stupid spending, because over 80% of the effects from spending government money is done by people other than the government.  Sorry if that wasn't clear from the original post.  If you don't understand what I'm talking about with respect to the 6 times multiplier, you should think it through.

 

That said, I'd agree with you that there is value in doing stuff other than trading financial assets.

 

Saving is frequently bad when it comes to growing and stimulating the economy.  It's frequently good when trying to avoid financial catastrophes.  I thought we were talking about the former.

 

Government spending does create more jobs than, say, tax cuts.  I can't remember the exact numbers, but it was something like a $1 tax cut generates $1.04 worth of jobs, while goverment spending generates $1.70 worth of jobs.  The reason is because of the 6 times multiplier.  Of the 6 rotations, 1 of them is done by government, and the other 5 are done by capital allocators.  That's why it works.

 

Cashing welfare cheques won't increase the output of the welfare recipient, but it will increase the output of the 5 people who use that money in the next year.  So yes, real wealth creation can come from it.  Not in the first iteration, but in later iterations.  (Just to be ironic, maybe the increased demand for food increases the need for farmers, which gives the welfare recipient a job.)

 

Of course, you can ignore these second order effects.  But it seems bad considering that the second/third/fourth etc order effects are in aggregate 500% bigger than the original event.  In fact, I think the your mental model of economics is probably broken if you ignore feedback effects of government spending, just because the later cycles are so much bigger in aggregate than the original spend.

[ERICOPOLY]

There is the matter of what you are left with.

 

Govt stimulus dollars spent directly on necessary improvements to transit systems leave us with a lasting improvement to drive economic efficiency over the longer term.

 

Govt stimulus dollars spent on booze/hookers/boomboxes do not.

 

 

[Williams406]

Although spending and tax multipliers are not my bailiwick by any stretch of the imagination, this discussion reminded me of some comments by Hunt/Hoisington in their third quarter 2009 review:

 

http://www.hoisingtonmgt.com/pdf/HIM2009Q3NP.pdf

 

On page three: "In previous letters we have discussed

the fact that the government spending multiplier

is zero (read Professor Robert Barro’s book,

Macroeconomics—a Modern Approach, p. 370).

This means there is no long term income benefit

from stimulus programs. According to the latest

academic research, the most recent $800 billion

stimulus plan will boost economic activity in the

short run, but will surely depress economic activity

over time. The government problem is complicated

by the fact that the tax multiplier is 3, meaning that

a 1% change in taxes will change GDP by about 3%

over time."

 

Richard, I note that you were speaking of job creation rather than GDP, so I run the risk of posting apples to your oranges. But, in case it furthers the discussion...

 

I am also curious about the source of the stat of $1 of government spending creating $1.7 worth of jobs.

 

Williams406 

[benhacker]

Ben, Ken Fischer was the source of the 6x statistic.

-- Got it.  I wasn't argueing with the stat, so I should not have said anything anyway.

 

Second, you missed the point.  Mortgage money, after it is spent the first time, is the same as government money after it is spent the first time, is the same as private industry money after it is spent the first time.  I used the phrase "mortgage money" because that was what economists looked at.

  -- To a first order, I agree.  The possible broken incentives that government create change how people allocation both human and other capital which can have a much bigger effect longer term than $1 of spending.

 

The whole point was that if someone spends $1, even if it's spent "unwisely", after that the money is spent by the private market 5 times.  The government spends $1 on booze. The liquor store spends it on beer and employees.  The beer manufacturer spends it on employees, hops, real estate etc.  The employees spend it on food, stereo systems etc.

  -- What is the $1 spent on booze makes each part of the productive chain less productive through providing a disincentive to be productive?

 

In effect, it's saying that it makes absolutely no sense to say that government spending is stupid spending, because over 80% of the effects from spending government money is done by people other than the government.  Sorry if that wasn't clear from the original post.

  -- It was not entirely clear, but the assumption that bad spending in a large part of our economy doesn't make our system less efficient by drastic amounts is absurd to me.

 

If you don't understand what I'm talking about with respect to the 6 times multiplier, you should think it through.

  -- Don't worry, I'm on board with Velocity...

 

That said, I'd agree with you that there is value in doing stuff other than trading financial assets.

-- Do you think the fact that SOOO many people in this country are inovled in the housing market has anythign to do with our governments poor 'allocation' choices?? I think so.  We subsidized housing (mortgage interest deduction, abnormally low rates funding by GSE backstop, and now tax credits, and cash for caulking)... what is the result of this.  "The money just moves around" and all is well with the system?  Not at all, what you get is a society that changes the way they behave.  They move into areas of the economy they wouldn't have otherwise, they feed off the system the government has created.  Goverment spending (if maintained over time) drives capital (abnormally) into an area it would not have been otherwise.  Sometimes this is good, some times bad.

 

Saving is frequently bad when it comes to growing and stimulating the economy.  It's frequently good when trying to avoid financial catastrophes.  I thought we were talking about the former.

  -- The first sentence should end "in the short term".... and the second sentence is probably what we should be thinking about.

 

Government spending does create more jobs than, say, tax cuts.  I can't remember the exact numbers, but it was something like a $1 tax cut generates $1.04 worth of jobs, while goverment spending generates $1.70 worth of jobs.  The reason is because of the 6 times multiplier.  Of the 6 rotations, 1 of them is done by government, and the other 5 are done by capital allocators.  That's why it works.

-- I wasn't advocating tax cuts per se.  I think these "create jobs" stats are all bogus, but I'd love to see the source.  Again, it's the quality, and longevity of the productivity / jobs that are created that matters.  We can all become mortgage brokers tomorrow if the government decided, but in 10 years when our economy blows up again, I'd have to argue with the rationale (again).

 

Cashing welfare cheques won't increase the output of the welfare recipient, but it will increase the output of the 5 people who use that money in the next year.  So yes, real wealth creation can come from it.  Not in the first iteration, but in later iterations.  (Just to be ironic, maybe the increased demand for food increases the need for farmers, which gives the welfare recipient a job.)

  -- This is crazy talk... the money has to be paid back some day... what did it create other than a bunch of unsustainable activity?

 

Of course, you can ignore these second order effects.  But it seems bad considering that the second/third/fourth etc order effects are in aggregate 500% bigger than the original event.  In fact, I think the your mental model of economics is probably broken if you ignore feedback effects of government spending, just because the later cycles are so much bigger in aggregate than the original spend.

  -- I think it is you are ignoring the second order effects.  We all (I hope) understand velocity very clearly.  In the short term, what you are saying is all good.  The question is what does this kind of wreckless spending we have been talking about incentivize?  The answer is "all the wrong things".  In order for wealth to exist, people and machines must create things cheaper, faster, with less raw materials.  When the government spending facilitates technology or infrastructure that makes this value creation move foward it's all good... but when the government sends a message that "booze and hookers" are what it values... or buying a mcMansion, or pushing paper around, than people will get the message loud and clear.

 

The long term of effects of some of the ideas here are devistating.  Incentives matter, and wealth can't come from stupid spending.

[kcbar]

I'm with benhacker. Government allocates a portion of society's capital. If it does so at a negative rate of return, it reduces output and standards of living for future years. Economic growth comes from good capital allocation. It's no different than your portfolio returns.

[RichardGibbons]

Benhacker:

Since there was such demand, I dredged up the link from my old email.  Here's the research of the $1.02 from tax rebates vs $1.59 in infrastructure spending increases from that notorious left-wing think tank, Moody's. :)

 

http://www.economy.com/mark-zandi/documents/assissing-the-impact-of-the-fiscal-stimulus.pdf

 

That said, if you're already convinced the stats are bogus, I'd recommend skipping them.  If evidence doesn't matter, why waste your time reading anything that disagrees with your viewpoints?  You could spend time with your family instead.

 

Looks like the best way of stimulating the economy is giving to poor people.  But if it's hard to convince you that goverment spending in general is stimulative, it would probably be even harder to convince you that the best type of spending is giving money to the people most likely to spend it.

 

That said, I agree with you 100%, ben, that broken incentives is a terrible side-effect.  Private industry is terrible at this, and I think you're probably right that the government is worse.  It's a huge challenge finding the right path -- every path has huge problems, which is why there's a discussion at all.

 

It was not entirely clear, but the assumption that bad spending in a large part of our economy doesn't make our system less efficient by drastic amounts is absurd to me.

Yep.  I'm not arguing that it's something that is immediately obvious or that reality is never absurd.  I think if you look around, I think you'll find that reality is often quite absurd.

 

[Financial catastrophes are] probably what we should be thinking about.

Yeah, I'd agree with this too.  It's much more sensible to avoid financial catastrophes in the first place. Once you're in one, you have to figure out how to get out, though.

 

Re: Real weath creation coming from welfare: This is crazy talk... the money has to be paid back some day... what did it create other than a bunch of unsustainable activity?

Interesting hypothesis -- because money has to be paid back someday, it can never lead to sustainable activity.  Better warn Buffett to stop issuing those zero interest bonds, since he'll have to pay back the money.  Prem must be completely insane -- why the debt?  And banks, well, we won't even go into how that business model is completely unsustainable, creating nothing of value ever.

 

That said, despite the jest, we mostly agree.  Incentives matter.  Stupid spending is generally a bad idea (IMO, even though stupid government spending is stimulative, it's a better idea to put it in smart things.)  As far as I can see, our main difference is that you seem to have built your belief system around the idea that goverment spending can have no long term benefits, which makes you occasionally need to do odd intellectual contortions, like claiming debt can't lead to sustainable growth.

 

Williams:

 

That goverment spending multiplier being "zero" argument seems nonsensical on the face of things, since if you let people work for money, it seems likely that they'll spend it.  But Barro must have some reasoning behind it.  I may read the book to figure out what he's actually trying to say.

 

The tax multiplier thing is pretty neat, though I'm not 100% sure of what it means.  Is the 3%number compounded annually, or just a one time thing?  I think neither makes sense really, though saying "over time" kind of makes it seem like it's a one time thing.

 

It seems extremely odd when combined with the Moody's numbers.  If both were true, then Moody's 1.02 yields a 3% increase in GDP. So, if you taxed to give foodstamps, you lose the 1.02 from the tax, but gain the 1.73 from the food stamps, resulting in some massive 50% gain in GDP. :)

 

kcbar:

So to summarize your perspective, if I take my money, spend it on cars that depreciate (a terrible negative return for me), that's far worse for the economy than if I hide it under my mattress for a 30 years (a 0% return for me), then die.  I disagree.

 

If you're simply saying that good allocation is a better idea than bad allocation, I'd agree.

 

(That said, I'm done with this thread -- not because I want to be rude and go away right when you make your most convincing argument ever, but because I'm an entrepreneur, and want to spend some time creating weath from minimal capital investment, rather than just talking about it.  :) )

[ERICOPOLY]

It might be time for the pet rock analogy again:

 

Government taxes everybody and has $10 to show for it.  Then the Government wants to "stimulate" the economy so they buy a pet rock from me for $10.  This pet rock I dug out of my garden, and it produces no utility.  It just sits on Obama's desk and keeps the wind from blowing away some paper.

 

Now, some would say that the money was spent on nothing productive, that it was a destruction of the country's wealth.  Now, I'd have to disagree with that statement, because I'm happy to now hold this "destructed" wealth.  Nothing was destroyed... rather, wealth was transferred from the taxed masses to... me.

 

Now, if the money was not taxed but rather was printed, then this is inflationary because it did not produce any productivity gains.  Meaning, there is more money out there now but no additional productive assets.  Perhaps this is a good policy for fighting deflation, but in a neutral environment it would tend to excite inflation.  The government... if it could instead buy a road or a high speed transportation network from me instead of a pet rock... well then it would be boosting the efficiency of the country.  And when you boost the efficiency, you then drive productivity gains.  That means that doing something meaningful with the printed dollars is less inflationary than doing something stupid like buying pet rocks.  Am I wrong?  Maybe, I'm not an economist and would love to hear why this is wrong.

 

[benhacker]

Thanks for the discussion Richard, clearly we are talking past each other.  I'll check that Moody's piece when I get some more time.

 

Eric, you set me up for my key point (not disagreeing with anything you said):

 

Then the Government wants to "stimulate" the economy so they buy a pet rock from me for $10.

 

I believe this sentence should be follow by "... thereby encouraging EVERYONE in the country to become pet rock manufacturers, sellers, etc."

 

And THAT is the problem. (what I was harping on regarding incentives).

 

Everytime the government makes an allocation decision, several things happen:

 

1) A lobbyist is (usually) vindicated/rewarded.  This encourages companies that don't lobby and didn't sell pet rocks, to now be forced to hire lobbyists so that their good of choice will be the next non-optimal government 'stimulus' target.

 

2) People who are generally highly intelligent motivated and prodcutive, now want to become lobbyists.

 

3) Individuals looking at their carreer options may focus more on being a pet rock salesmen, manufacturer, or marketer... "it's where the money is!"

 

4) Companies create a new division called "How to get the most out of the stimulus plan for XYZ Corp"

 

5) Entrepreneurs who didn't sell pet rocks feel like the system is stacked against them, thus lowering their productivity and incentive to work.

 

6) All else equal, the non-optimal use of capital will come with a cost, lower growth, high taxes, or higher inflation.

 

7) Lastly, and most incidiously, the population gets the feeling that handouts are somehow free AND that they derserve one free, becasue it's clear the pet rock guy didn't deserve it.

 

Richard chose to misread what I said above with reard to debt, and that is fine.  Debt can be good, and government spending can certainly be good.  Non-optimal spending is always and forever terrible, and we should never accept it... in the case of debt fueled crappy spending, the debt remains and all you have a asset worth lesst han the debt, OR, in the case of hookers and booze, nothing at all.  It's like those who thought a little bit of stupid spending in the stimulus is ok because it will "hit" the economy faster, so build a few hooters, or put some "jobs" in a state where you need a senators support and it's all good.  It's bogus thinking and a 3 year old knows it.  Want to have the money hit faster, just give it to citizens on a pre-paid $200 debit card that has to be spent in 60 days... seems simple, but it wasn't done...

 

I should probably stop talking here because this is an investing board, but capital allocation at the macro level and at the individual company level are very similar.  Good allocation is usually obvious.  Many economists and sympathizes and burearats try to spin it that doing things that are obviously stupid are somehow warranted because of XYZ but they are all missing the point.

 

I'm all for government regulation of certain activiites (banks, utilities, airlines, key infrastructure (roads, telco, airwaves), etc).  I'm all for RATIONAL government spending that is fully transparent and planned over a long time frame.  I'm not averse to debt, but I do believe that when using debt you must be financing AN (appreciating) ASSET that has a longer life than your debt maturity.  The problem our GOV has is that so much of our spending is debt financed, that we are now in a structural deficity position just to maintain operating costs of our government; forget infrastructure.

 

I believe what I have said above is universal and almost inarguable (maybe people disagree on regulation, etc, I'm talking about the allocation of capital part).... not because I'm some economic wizard (I'm not) but because it is freaking common sense.  We can all disagree on shades of grey, but to believe that good can come from wreckless spending is so totally ridiculous.  I'd appreciate anybody who thinks what I've said is wrong to speak up...   I won't respond, I'll just listen. :)

 

In the end, Richard wasn't really defending wreckless spending, but he was excusing it for the sake of the greater good of the times.  That's fine and all, and we have emerged from our near term problem a bit which is good.  In the long run however, our government is wasting billions of dollars a year in the name of "job creation" and has done so for so long that we are in quite a pickle.  I think the times for excuses are past, and times for excusing should have ended years ago.  Everyone (in government) should know what should be done (to a rough degree), the fact that it's not happening should no longer be excused.

 

Ben (sorry for typos, wrote too fast)

[Myth465]

Humm I am not sure where the wires were crossed but, I cant see how many people would find it hard to disagree with Ben. Also its nice to see that people are thinking through issues and arent just hammering on an agenda or ideology.