'nobody could have predicted...' | 34 comments (34 topical, editorial, 0 hidden)

Kickstarting Policies. (none / 0)

In the round, it increases income, because when governments order goods and services in the middle of a recession, producers fulfill those orders. It then is distributed as earnings primarily to wage and salary incomes, since profit earnings are low in the middle of a recession.
Tax cuts depend on consumption spending for their stimulus in the first round, as well as in later rounds ... government spending only requires consumption spending in the second round and later effects. The immediate income and employment impact is not subject to being undermined by dropping propensities to consume.

Ok, so consumption is fueled by expanding the money supply, to create capital to be employed in kickstarting consumption, but this involves a great deal of inflation. So in the end existing wealth is diluted in order to allow for the economy to generate social income.

Don't you see that pissing some people off?

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sun Oct 12th, 2008 at 06:42:47 PM EST
[ Parent ]

In what alternate universe is this inflationary? (4.00 / 3)

The immediate spending is in the middle of a deep, global recession. So there is no serious risk of a demand-driven inflation component.

And once the infrastructure that is being constructed comes online, the result is an increase harvest of domestic energy supplies and reduced energy consumption, which is an increase in aggregate supply that is the only serious prospect for countering massive cost-push price inflation from imported energy over the next two decades.

Where is the inflationary impact?

Government spending creates fiat currency, as always, and that fiat currency is used to mobilize currently unemployed resources, which is not an inflationary use of newly created purchasing power, and the portion that is recirculated and used to finance consumption spending also mobilized unemployed resources, which is not an inflationary re-used of that newly created purchasing power.

Certainly any effort to get the same effect primarily through monetary policy might be inflationary, but then that would be because of the extreme ineffectiveness of monetary policy in the face of a strong recession, especially when it is a global recession so that neo-mercantalist exchange rate policy is unlikely to lead to any substantial growth in export demand.

As far as "create capital" ... it is hard to tell in reading this whether the "capital" is finance capital (claims on incomes flowing through going concerns) ... real economic capital (goods and services that expand the productive capacity of the economy) ... or a Three-Card-Monte conflation of the two.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 12th, 2008 at 07:07:37 PM EST
[ Parent ]

Re: In what alternate universe (none / 0)

Ok, what I was trying to say here is that:

There must be massive deficit spending.
This deficit must be financed.
The Chinese don't look willing to make the loan.
So we make the money by printing it.
The amount of money printed is not going to be matched by an equivalent amount of goods.
There will be more money to buy roughly the same amount of goods.
The amount of money required to buy the same amount of goods will increase.
Inflation.

And I'll give my consent to any government that does not deny a man a living wage-Billy Bragg

by ManfromMiddletown (manfrommiddletown at lycos dot com) on Sun Oct 12th, 2008 at 10:17:21 PM EST
[ Parent ]

Re: In what alternate universe (4.00 / 2)

On 2:

This deficit must be financed.

You mean the trade deficit impact of the spending? Well, yes, but in the middle of a global economic downturn is the time when it will be least difficult to finance that ... and it only needs to be finance, since it is self-funding, given that the eventual savings on the trade account will more than offset the original trade-account impact of the government spending on infrastructure.

On 5:

5. The amount of money printed is not going to be matched by an equivalent amount of goods.

Why not? I would argue the exact contrary: under strong recessionary conditions, the amount of money printed will of course be matched by something quite close to that amount of newly produced goods and services.

It is a major government spending program on infrastructure when the economy is booming, or at least well advanced in a normal recovery that the spending will not be matched by that amount of newly produced goods, but instead will in part shoulder aside existing production, which is an inflationary process.

You seem to be assuming that when faced with the orders from the government, suppliers will turn their backs on orders from other customers, rather than increasing production to meet the new orders without turning away existing customers. Which in a deep and global recession is presumption that I find to be absurd.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sun Oct 12th, 2008 at 10:25:41 PM EST
[ Parent ]

Re: In what alternate universe (4.00 / 3)

Infrastructure is wealth.

It's indirect wealth - it doesn't live in warehouses, and people can't buy it directly.

But if breeds wealth in the same way that lack of infrastructure - including lack of banking infrastructure - destroys it.

If you're losing spending power, it doesn't matter if you're losing it to inflation or because items are piling up in the docks because no one can offer a credit line for it.

There's also the subtext that 'inflation' is often really just code for 'worker power.' But that's for another diary.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Oct 13th, 2008 at 05:42:45 AM EST
[ Parent ]

On the subtext, quite definitely ... (none / 0)

... when there are members of the Federal Open Market Committee who talk about wages increasing at half the rate of productivity growth as an "inflationary threat" that may have to be tamped down with a rise in the cash rate ... while asset-price inflation is always for the best ... its clear that the obligation to pursue a full employment economy is primarily honored in the breach.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Oct 13th, 2008 at 05:28:50 PM EST
[ Parent ]

'nobody could have predicted...' | 34 comments (34 topical, 0 editorial, 0 hidden)

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