Stimulus Package

            The Federal Government has started to send out stimulus checks to income taxpayers.  This scheme is based upon the Keynesian idea of increasing Aggregate Demand (AD).  The theory is that sending checks out to the people, the money will be spent on consumer goods.  This increase in demand for consumer goods will become the income of those businesses, which will in-turn, be able to spend that money on their suppliers and employees.  These expenditures will be multiplied throughout the economy, thus increasing AD and raising the economy up from a recession.

            The mainstream detractors of this plan have rightly pointed out that the last time there was a stimulus package only 22% actually went into spending on consumer goods.  The rest was used to pay off debt and saved due to an uncertain future.  Recent polls have suggested that the results are going to be very similar to the previous stimulus package—about a quarter will be spent while the rest will be saved or used to pay off debt.  Thus the Keynesian critics argue that this program is pure folly, since it won’t boost consumer spending.  Government would spend the whole dollar, not just a quarter of it; so junk the “give away”.

             To me there seems to be another, unexamined side to the story.  Setting aside the flawed Keynesian paradigm, let us at least agree that the majority of the stimulus package is going into savings.  From the Austrian perspective, this “give away” might not be such a bad thing.  According to the Austrian Business Cycle Theory, the problem is that malinvestments are built up during the artificial boom through credit expansion.  The recession is the liquidation of these malinvestments.  The liquidation process can be expedited and dampened by increasing the amount of savings in the economy.  By “injecting” fresh savings into the economy, some of the malinvestment can be converted into good investments faster and at a less depressed price.

            The best policy is, of course, to cut taxes on savings and on savers.  However as a second best, the stimulus package has its positive aspects.  If the taxes that it collects are from streams that would go into present consumption at a rate greater than 25%, then the effect of the stimulus package is to divert current consumption into savings.  In other words, for completely the wrong reasons and in a backwards manner, it is possible that the supporters of Keynesian economics might actually help the economy.

There's a consequence of this that you don't seem to examine.  This "giveaway" (as if returning some of what's been taken is a gift) could also be seen as an attempt to placate the voter and get their loyalty (and votes) by what seems to be to an advantage to the person on the street, who may not consider that the money the government puts into this is money that will be added to the national debt.

Hey - it got FDR reelected, didn't it?

It also serves to get people who would not otherwise need to file to register with the IRS - an effective, inexpensive way to get that database as current as possible.

Danno, remembering that very few things in real life are 'purely' economics.

Danno,

There are many consequences that I am not examining, but my intent was not to give a full discourse on the stimulus package.  Instead, I think that the idea of increasing savings as an Austrian policy tool needs to be looked at.  There are far too few policy recommendations that Austrians can provide and I think that they should be explored.

Perhaps it is because it is not the goal of the Austrian School to give policy prescriptions, but to perform economic analysis. What it can do I suppose is evaluate, amongst a set of policies, which is the least bad.

-Jon

An important point is that as long as these tax rebates are not matched by a reduction in spending, the net effect is just inflation of the money supply. There is no real increase in saving, only a percieved one, which is what got you into this mess in the first place.

The really sad part is that the Fed has been slowly reducing the supply of money and this is only going to force it to lower interest rates further so savers in foreign countries pickup this debt.  So we get more inflation higher raw material prices and a longer recession.

Economic analysis aside, I find it to be rather insulting. I would compare it to the king giving you back a tiny portion of what they original stole from you and your ancestors as a way of baiting you into remaining complacent. Bread and circuses for the purpose of fostering apathy.

Billott1, I'm confused as to how reducing the money supply will lead to lower interest rates.

-Jon

Zlatko,

I don't think that your point necessarily follows.  Suppose that governmental spending is not reduced.  If the tax stimulus package shifts money that would normally have a present consumption/future consumption ratio of greater than 1/3rd (i.e., greater than 25%/75%) into a stream of spending (via the stimulus package) where 75% is saved, then yes, at the margin, there would be a real increase in savings.

Brainpolice:

Economic analysis aside, I find it to be rather insulting. I would compare it to the king giving you back a tiny portion of what they original stole from you and your ancestors as a way of baiting you into remaining complacent. Bread and circuses for the purpose of fostering apathy.

Ditto; it's all rather duplicitous, and despite having already done my taxes this year, I feel uneasy about receiving said inflation check, let alone this being the first year in which I feel genuinely disgusted with myself for doing taxes lest the mob comes after me if they're bored on a particular day.

I'm unsure if spending it on possibly kick-starting some agora activity (or on some reading list material @ a used book store that I should be reading, instead of skimming the wikipedia entries about...), or not spending it at all would be the best course of action for when it comes in the mail.

I just reread your post. If I understand correctly, you're saying it is possible that the amount that was taxed would have gone into consumption at a higher rate than it will when it is given back again.

In that case, I agree, that does indeed seem possible.

austecon:

To me there seems to be another, unexamined side to the story.  Setting aside the flawed Keynesian paradigm, let us at least agree that the majority of the stimulus package is going into savings.  From the Austrian perspective, this “give away” might not be such a bad thing.  According to the Austrian Business Cycle Theory, the problem is that malinvestments are built up during the artificial boom through credit expansion.  The recession is the liquidation of these malinvestments.  The liquidation process can be expedited and dampened by increasing the amount of savings in the economy.  By “injecting” fresh savings into the economy, some of the malinvestment can be converted into good investments faster and at a less depressed price.

I don't see how you could increase the amount of savings in the economy by devaluing the currency and more than likely keeping the savings rate equal when all things are considered.

This is another Keynesian fallacy, that you can paper over the recession by injecting more money to dampen the liquidation process. This latest boom-bust cycle has shown that the usual bag of tricks are no longer working as intended as can be seen by the current Fed shenanigans that are aimed at keeping the banking sector above water, forget about helping the economy. They're fighting tooth and nail just to survive.

By keeping the malinvestments at an artificially high value so they can be "converted into good investments faster and at a less depressed price" you are just rewarding people who made a bet and failed — introducing moral hazard into the equation. Next time they are going to less cautious (if that's even possible at this point) because they know that they will be assisted by the State if they make a bad call and won't have to accept the full responsibility for their actions, they get to share the burden of their failure with everyone else through the actions of some bureaucratic third party.

I also doubt that Mises meant 'liquidity injections' when he said 'increased savings'.

I find it most unfortunate that the government takes it upon itself to tax me and do all the necessary work to determine my tax liability (since I haven't filed in at least 6 years) but won't go to the trouble to automatically send me a stimulus check. Or more correctly apply it to the amount that I allegedly owe them. Bunch of frickin' hypocrites is all I can say.

I still think the only reason the IRS leaves me alone is because the majority of the money I 'owe' them was earned during my war profiteer days and what auditor wants someone who is crazy enough to go get shot at as an unarmed civilian sitting across the desk from them during what can only be described as a stressful situation? Plus the time as an armed combatant that also shows up for the years in question...and the estimated 20% or so returning solders that suffer from PTSD...

Oh, sorry, I forgot that talking about my time as a solder was taboo on these forums.