We want to crowd out private investment.
Some of the complaints in the US and elsewhere against stimulus plans for the economy are that the expenditure today, and the debt repayments in the future, will somehow 'crowd out' wonderful efficient private activity and investment.
But with unemployment rising, I want to crowd out queueing for dole cheques. I want to crowd out the watching of daytime TV by the unemployed. I want to crowd out jobhunting. Instead, I want these people to have a job and do something useful for themselves and for others.
And let's be clear about what 'investment' means in the current context. When a firm builds up a unsold stock, this is classed as 'investment'; the firm produced it, but nobody has yet consumed it, so it is considered to be an investment by the firm which it can turn into cash later if it can sell it.
Should we be proud of rising 'investment' if it simply means millions of unsold cars gathering dust? This is unwanted investment. The firm, if it doesn't see any chance of selling soon, will then cut back production. This will mean unemployment, meaning decreased consumption, and other businesses having unwanted investment and the vicious circle. This is the classic Keynes model and is exactly what we see today.
The stimulus package will pay for itself. The decrease in unemployment will mean much more activity that wouldn't have happened otherwise; and even the employed people will find themselves busy again (I'm sure many employed people are currently underemployed as orders dry up in their workplace). The gains, financial and material, from this activity could more than pay for the stimulus.
Comments
It's great to see someone
It's great to see someone reading the Mises forums, but I have to disagree intensely.
I too want to see a reduction in dole queues and daytime soap opera wacthing. But this can be done most efficiently is prices and wages are allowed to fall.
I think you have also fallen into the fallcy of job creation. Jobs do not exist so that people have "something to do" or to "give people money", bot rather to satisfy consumers' desires. Any government works projects will simply divert resources away from this purpose and delay recovery. Remember, since the government is a non-market entity it has little knowledge of how to calculate economically. I have also summarised why resources are idle and why it's undesirable to "stimulate" them back into production:
http://irishliberty.wordpress.com/2009/04/07/idle-resources-explained/
Oh and another thing. What we are seeing is not the Keynesian model, but rather a classic Austrian boom and bust.
-Matt
Finding a new use for the idle resources.
Reading my comment again, I see I was being overly certain. I should have highlighted the reasonable opinion of others to the contrary, even though I still think that the standard Keynesian model is reasonably accurate. And I don't think Keynes was overly concerned with the causes of specific busts, but was more interested in what to do to improve the situation.
For every analogy that suits the Austrians, there is another that suits the Keynesians! Even in your circus example, I would still consider the restaurant and its employees to be idle resources. Perhaps the best use of those resources is as something other than a restaurant. The building could be used to host some other business, and those employees were doing something else before the circus came. Is there any guarantee that such an alternative use will be found?
So even if all economists agree that the restaurant needs to close, we don't necessarily agree that stimulus is wrong. Imagine the population of a country doubles overnight with all the new people having the same skills as the current population. All the people could instantly find employment, employing each other at first duplicating the 'original' economy. (Assuming the infrastructure such as roads doubles overnight also). But it is more likely that they would all be unemployed at first, they wouldn't yet have formed the relationships that the original population have. So here we have two scenarios, one with full employment and the other with 50% unemployment, despite each scenario having the same population and resources. If the population and infrastructure doubled overnight, there is no reason to believe that all the potential employment would be created instantly to take advantage of the idle infrastructure. More likely the 'original' economy would be distorted to provide food and shelter to the new population; so instead of doubling TV production we could find the production of TVs actually falls to make way for food production. Government intervention would be better than nothing in this case, causing the new population to make some, if not all, of their own food (and TVs and cars and so on). It might be very inefficient compared to the theoretical optimum, but in reality the only viable alternative is even more inefficient 50% unemployment.
The multipliers are the attempt to quantify how much of the stimulus activity is genuinely new activity, as opposed to crowded out alternative spending/investment. In your article, Murphy says:
"is it really the case that every last person even remotely involved with the project, will come from the ranks of the unemployed who are within commuting distance of the Houston bridge site? "
I don't think any Keynesian would have made that argument. It's a straw man!
Thanks for making me think of these issues again. I'm just a very amateur armchair economist, but I enjoy thinking about these issues.
Aaron
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"I would still consider the restaurant and its employees to be idle resources. Perhaps the best use of those resources is as something other than a restaurant. The building could be used to host some other business, and those employees were doing something else before the circus came."
I don't think that anyone would object to calling the unemployed labour and capital "idle". But if it is true as the Austrians claim, that they have been misallocated during the boom, the logical follow-on from that is to permit liquidation to occur, allow prices and wages to fall, and to cut government spending! A recession is not the problem, but rather the solution to the problem (the unsustainable boom).
I guess the dfference between your example and mine is that yours isn't entirely correct. It doesn't discuss the boom part of the cycle at all, for instance.
-Matt
-Matt
A medical analogy.
One doesn't have to explain the cause to be able to offer a cure. One doctor might know the cause without knowing a cure, and another doctor might not know the cause but know what cure works for the given symptoms. The latter doctor is the one you want when you're sick. Most drugs prescribed today aren't fully understood, but they are proven by experiment to work well for most patients.
The idea that a cure can be 'wrong' because it doesn't include a description of the cause is not valid.