Posted by
Andrews on Wednesday, February 25, 2009 4:25:03 PM
I was reading
an article by N. Gregory Mankiw. It is a mixed bag, some good, some bad. For example, he gives the Keynesians more credence than I would, even accepting that the "multiplier" is a meaningful number. (Like the "velocity" of money, I tend to think it is a defined term that has no real meaning.) He also speaks of government intervention as if it were a given that such intervention is necessary. As a guess, I would assume Mr. Mankiw favors the Friedman wing of the Monetarists, but that is guesswork based on a little knowledge of his previous policy positions and this essay.
Still, despite that, he does point out something that is often forgotten:
If you hire your neighbor for $100 to dig a hole in your backyard
and then fill it up, and he hires you to do the same in his yard, the
government statisticians report that things are improving. The economy
has created two jobs, and the G.D.P. rises by $200. But it is unlikely
that, having wasted all that time digging and filling, either of you is
better off.
People don’t usually spend their money buying things
they don’t want or need, so for private transactions, this kind of
inefficient spending is not much of a problem. But the same cannot
always be said of the government. If the stimulus package
takes the form of bridges to nowhere, a result could be economic
expansion as measured by standard statistics but little increase in
economic well-being.
What he fails to note is not only some government spending of this nature, but most of it is. In fact, even productive government work is of this nature, as , had government not done it, private enterprise would often do it at less cost.
For example, before UPS, FedEx, DHL, and the rest, the post office was the sole carrier of packages. The cost was higher and satisfaction lower. So, even though it was productive work, there was also a cruft of government inefficiency which, in effect amounted to digging and filling holes. If something can be done privately, having the government do it at higher cost or lower efficiency represents a net loss of wealth.
Nor does the government have to be funded by taxes or borrowing for this to be true. If the government inflates instead, it is true they aren't taking money from us directly. But by causing the value of money to drop and spending their new dollars before the market adjusts, they are effectively stealing from everyone in proportion to the wealth they hold in cash. (Adjusted by the speed they spend it, as those who buy before prices rise are hurt less than those who spend later.) So even inflationary funding causes a loss of wealth, despite Keynesian claims to the contrary.
Then again, his point is important for another reason. We tend to measure recovery in monetary terms. Economic growth, GDP, the Dow, all are monetary measures. Which means that various tricks (eg. hole digging) as well as inflationary manipulation of money, can make it appear our economy is in much better shape than it really is.
That is an important lesson, as I have a feeling when the inflation needed for trillions of dollars of bailouts enters the economy we will see claims that the inflationary increases in economic indicators are signs of a recovery, when they are simply indications of a manipulated money supply.