Do The Math

I attended the Waterloo Region Food Summit keynote last night and learned quite a bit about food banks and farmers. One speaker was from The Stop, a food bank  in Toronto and she talked about a new campaign to make policy change on poverty in Ontario. It’s been a long time that politicians have been talking about reducing poverty, but very little is happening.

The current recession makes the need more urgent, but also makes the decision to spend more to reduce poverty more financially responsible. Economists are quite clear that the best way to get more money into circulation in the economy is to give it to the poorest people you can find, because they will spend it, while those of us who are well-off are more likely to dump it into a savings account. And yet governments are still not putting the money where it is most needed, and food bank use is increasing rapidly.

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15 Responses to Do The Math

  1. Lukas says:

    Not all economists agree on the spending theory. Austrians believe saving is how to grow an economy. Savings are used to invest in companies, which hire employees, thus growing the economy. Taking money from taxpayers and spending it or giving it away actually burdens a growing economy.

  2. Yaacov says:

    Lukas, I have to disagree. While savings are often used for investment, this happens much more frequently during economic boom times than during recessions. During slow economic times banks make few loans and people are shy to invest new money, so savings sit in bank accounts and the economy continues to stagnate. That’s why economists recommend putting money into the hands of those who will spend it rather than save it.

  3. Lukas says:

    I guess we’ll have to see how all this plays out, but as of right now I’d say the Austrians are correct. Governments have been spending extreme amounts of money and very little is improving.

  4. Yaacov says:

    Lukas, could you give me a link to the “Austrian” view that increasing savings is the right way to stimulating a recession economy? I can’t seem to find anything supporting that via Google.
    In answer to your comment, government spending in general is not what I’m advocating. It’s specifically spending that gets money into the hands of the poorest people in society, which is not what most anti-recession government spending in Canada and the U.S. has been. So regardless of what you think of the results of government spending in this situation, it doesn’t bear on the point I’m making.
    Also, GDP growth is back up, reaching 0.8% for Q4 of 2010, which is pretty normal for the last thirty years. Employment numbers, on the other hand, still suck but they generally lag GDP changes so we don’t know yet how uch they will recover. So to say “very little is improving” needs some qualification.

  5. Lukas says:

    Some links I found:
    http://mises.org/daily/3194
    http://www.economicthought.net/2009/08/correction-on-the-austrian-business-cycle-theory/

    Again, why do you refer to GDP numbers? They are totally skewed because they include government spending. Growing the government does not grow the economy. In fact, how much did the government deficit grow in Q4 2010?

  6. Yaacov says:

    Thanks for the links. I’m a bit surprised that neither one is to a serious economist. The Murphy argument is weird. He says that Krugman is wrong about a drop in spending being a bad thing, but gives an example where spending is reallocated, not dropped, as a counter example. In a recession, people save their money because they are worried that they will need it in some undefined future scenario. They don’t allocate it differently, they hoard it. And they hoard it until they regain confidence in the economy, which requires people to be spending money, which isn’t happening. No argument about changing buying priorities affects any of that.

    I don’t think I understand the background of the second link well enough to see how it is an argument that savings will increase economic activity during recessions. I get that he’s saying the arguments against Austrian school are unfounded because they don’t differentiate consumer goods from capital goods, but I’m missing the savings-recession connection.

    “Again, why do you refer to GDP numbers?” Because they are the best proxy I’m aware of for the level of economic activity. Remember that GDP dropped significantly during the government actions to prop up the economy, but with the stimulus spending largely finished, we are now seeing continued GDP growth. As a result, it’s unlikely that government spending continues to be the main factor in that growth. Do you have a different indicator of economic activitiy that you think is more accurate?

  7. Lukas says:

    No, actually I don’t have any other indicators, but looking at GDP, trade imbalances, employment figures and government debt we can see the economy is definitely not improving.

    Well, government spending is still increasing, and the central banks are still printing money, so I wouldn’t say they’re still not the main factor in GDP growth.

  8. Yaacov says:

    “No, actually I don’t have any other indicators, but looking at GDP, trade imbalances, employment figures and government debt we can see the economy is definitely not improving.”

    Yeah, I agree that the U.S. economy is doing poorly on the basis of the combination of those indicators. The Canadian economy is doing somewhat better, though certainly not well on the employment numbers.

    Historically though, government spending has pulled recession economies back on track on the basis of all four of those indicators. So the general principle of government spending as a method of reanimating economies does hold.

    In the current case, one big problem is that “quantitative easing” in the U.S. is essentially printing money. So it’s unsurprising that their economy is not recovering well. If they paid for stimulus by raising high bracket taxes instead, they’d be in a much better situation.

  9. Lukas says:

    I totally disagree that government spending does any good. Economies recover from recessions despite government intervention… do we want to debate the great depression?

    I’m happy to hear you are against money printing. I was wondering how you felt about central banks.

    And as much as you say the Canadian economy is fairing better, well, we’re still waiting for the housing bubble to pop here. Let’s face it, the US money printing is affecting all of us too, as it is driving up the prices of everything, no matter what currency you use.

  10. Yaacov says:

    Lukas I’d be very interested to hear your views on the Great Depression, given that it lasted until government spending recovered.

    “And as much as you say the Canadian economy is fairing better, well, we’re still waiting for the housing bubble to pop here.”
    But we’re not expecting the housing bubble to have the knock on effects that wrecked the U.S. financial services sector.

    “Let’s face it, the US money printing is affecting all of us too, as it is driving up the prices of everything, no matter what currency you use.”
    Absolutely. They need to stop printing money and instead finance their activities via reductions in military spending and increases in high bracket taxes.

  11. Lukas says:

    The Great Depression ended when the government finally got out of the way: http://www.realclearmarkets.com/articles/2009/06/world_war_ii_did_not_end_the_g.html

  12. Yaacov says:

    The description of government actions in that article is misleading. Though this isn’t a response to it, it makes clear many truths which are hidden in the link you gave: http://www.brookings.edu/~/media/Files/events/2009/0309_lessons/0309_lessons_romer.pdf

  13. Lukas says:

    Okay, second paragraph, Romer tries to compare unemployment numbers of 8.1% and 25%. Is that really true? Do we not count unemployment differently than we did in the 30s? I really don’t think this is a fair comparison. If we used the old calculation wouldn’t unemployment be closer to 20% and definitely not improving like the government wants us to believe.

    Oh, and now she’s comparing GDP numbers, and you know my feelings on GDP! And why compare GDP numbers from the boom to the bust? The boom was an artificial economy anyway, so everything was distorted. The recession is when the world rebalances the imbalances that occurred during the boom. I don’t understand why Keynesians have such a problem with people increasing their savings during a recession. If you lost your job, wouldn’t you have to cut your expenses and rethink your spending strategies? Why does this thinking change when we talk about countries? Logically it makes no sense to me…

    Yaacov, the other thing is that the economy is a very, very, very complex creature. Every transaction plays a role, and for every transaction that does occur, there are countless other transactions that could have occurred if it didn’t. I suppose you think a broken window is a good thing because it stimulates the economy. But logically this makes no sense, because something was destroyed. Sure the window owner now has to spend money to repair it, and the window maker now has more money to spend, etc, etc. But on the other hand, if that window owner didn’t have to replace the window they could have spent the money on something else. Destroying something is not productive for society. If that were the case we could employ half of society digging ditches, and the other half filling them in. Sometimes as economists we need to think about things logically and stop looking at the numbers.

  14. Lukas says:

    Sorry, I really should proof read my posts before submitting. I’m not always that clear…

  15. Yaacov says:

    “Romer tries to compare unemployment numbers of 8.1% and 25%. Is that really true? Do we not count unemployment differently than we did in the 30s?”
    I’m no expert, but I believe the answer is yes, they are counted the same way. In 1929, the unemployment rate was 3.2%, while by 1933 it was 24.9%, so even if there was a difference in measurement, the 1929 rate shows that it wasn’t causing major overstatement of unemployment.

    “And why compare GDP numbers from the boom to the bust?”
    GDP numbers have a lot of problems, especially when used as indicators of economic health, or of productivity of goods and services versus investment vehicles, but they are a decent measure of overall economic productivity. I don’t really understand why you think government spending shouldn’t count in GDP. It employs people and results in actual goods and services, which seems to be what we want GDP to measure.

    “The boom was an artificial economy anyway, so everything was distorted.”
    It was one of the least regulated economies since before the Roman empire, so if you call it artificial, then you’re calling everything artificial. Check out this timeline for the 1920s: http://www.huppi.com/kangaroo/Timeline.htm It demonstrates pretty clearly that deregulation was rampant and played a big role in creating the bubble.

    “If you lost your job, wouldn’t you have to cut your expenses and rethink your spending strategies? Why does this thinking change when we talk about countries? Logically it makes no sense to me…”
    The illogical part is where you assume that people and countries are equivalent.

    “the other thing is that the economy is a very, very, very complex creature.”
    And that is why it drives me nuts when people tell me that every problem with this very, very, very complex creature can be fixed through deregulation.

    “I suppose you think a broken window is a good thing because it stimulates the economy.”
    You suppose wrong. The fact that disaster relief feeds GDP as much a true productivity is one of my beefs with GDP.

    “But on the other hand, if that window owner didn’t have to replace the window they could have spent the money on something else.”
    I suggest reading about the velocity of money. This idea that if money isn’t spent on one thing, it will be spent on something else has popped up a couple times in our conversations, and it doesn’t make sense once you know a thing or two about velocity of money and how it affects economic activity.

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