I'm ill as hell today. Still managed to finish it though!
Rough Transcript: Remember the movie back to the future 2? The villain uses a time machine to go back 30 years and change the timeline.
In the alternate timeline, the good guys are either dead or subjugated by the villain, who is so powerful he can essentially do whatever he wants.
The people of the alternate timeline are oblivious to how they ended up in that mess and just assume it's the way things are meant to be.
This is kind of the same thing we see with government stimulus. Essentially, our future could go one of two ways: with stimulus, or without. When stimulus is applied, the result is that people are in worse shape, and don't recognize what they've lost by government altering the timeline.
Let me first say that I'm talking mostly in terms of fiscal stimulus here, like the TARP, Obama's $700b stimulus, and the upcoming $15B jobs bill. However, many of the things I'm about to say could be applied to monetary stimulus as well.
Let's pretend first that you're an investor in 2008 after the stocks, housing, and other asset prices have fallen dramatically. Things are uncertain, and you want to be very careful in reinvesting your money. You're going to choose businesses that look like they have a healthy outlook. You're going to research, and you're going to pick your next investment solely based on the profit it will yield.
Government, on the other hand, does the opposite: Stimulus projects are chosen not based on what will be the biggest wealth producer in the future, but by a myriad of other factors including: - Who paid what in campaign contributions - Is the business located in my district where it will employ my constituents - What the most influential lobbyists are saying - What the politician is currently invested in*
*I bet you didn't know that it's actually legal for politicians or their friends to invest in a business they know will benefit from an upcoming piece of legislation. They can therefore use your tax dollars to bolster a stock and enrich themselves.
A lot of economists reply to this and say: "So what? It doesn't matter what the money is spent on. As long as the money is being spent, it will create jobs and help the crisis." This is what the Keynesians call boosting "aggregate demand."
The problem with this is two fold 1) Jobs are not about babysitting people or generally killing their time and handing them a paycheck, they're about creating wealth. 2) The money comes from somewhere, and invariably is shunting money away from legitimate long-term investments
Let's talk about jobs. Like I said, jobs are about creating wealth. I'm going to use a quick example of how wealth is created, so you can understand how it is our standard of living rises.
Say I save up and buy an empty plot of land and some saplings for $1,000 dollars. I spend another $1,000 on labor and grow the trees for lumber. I sell the rights to the trees to a lumber company for $5,000. Did you see that? I just created $3,000 of wealth. It doesn't end there, either. The lumber company cuts the trees down and processes them into planks and blocks at a cost of $1,000 in labor, $1,000 in machinery costs, and resells all that wood for $10,000. They have just created a net of $3,000. The company they sold the wood to makes furniture in a factory at a cost of $2,000 for the labor, $1,000 for the machinery, and resells the pieces for $20,000. Another $7,000 is created.
The laborers and capital investors of this scenario added $13,000 in value. That value is reintroduced into the economy either through consumption or yet even more capital investment. Using my profits from my tree farm, I can now choose to spend another $2,000 and double the size of my business. Then I could put the other $1,000 in the bank and they might loan that money out to someone else who might start their own businesses.
When government ties up labor for its own purposes, that labor never creates as much wealth as it would in the private sector. This can be due to the laziness of government contractors or employees, but it's also due to the fact that the investor chooses projects based on yield whereas the government does not. Essentially, government money is primarily either paying people to work less productively or paying people not to work at all.
Therefore, the biggest problem with government spending is not the taxes, it's actually the loss of the fruits of the labor we would've gotten in the alternate scenario where government was smaller and employed fewer people.
Now let's talk about the money. 100% of these stimulus packages have essentially been lumped into the national debt. People know that debt is simply deferred taxation--that we're syphoning off our children's future in exchange for a better standard of living today. What you probably didn't count on is that even in the present, large deficits have repercussions.
The national debt is composed of bonds. Bonds can be bought by anyone, and in fact despite what you may have heard, most US bonds are held domestically by Americans and American institutions. The biggest foreign bondholder is Japan, followed by China.
The question that you need to ask is: where is the money for the bonds coming from? People invest in US treasury bonds because they're perceived as a secure investment. In fact, until recently, most investors wouldn't even fathom a future where US Bonds wouldn't be the most secure investment out there.
In spite of the ballooning debt, people are still buying these bonds. The question is, as an investor, if in an alternate timeline, the government weren't issuing bonds, where would your money be?
Unless these people are inclined to keep their money under their mattress, their money would either be in other, carefully-chosen investments or in a bank. What does a bank do with deposit money? It also carefully invests.
So basically, by issuing government bonds, the government ensures that those monies are not put into the wealth-producing private sector, but instead into the wealth-draining public sector.
Not only that, but there's the obvious problem with having to pay back those bondholders in the future, which is paradoxically better for the economy than the stimulus the debt was used to fund. (74,120)
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