Wednesday, January 21, 2009
Here's why mainstream economics lives in the wrong paradigm
Excerpts from a story that appeared in the Chicago Tribune.
John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies."
Like revisionism in history. The "Holocaust didn't exist," etc.
New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research."
Nobel Laureate Gary Becker says any benefits will be modest at best.
For the government to finance infrastructure spending or tax cuts, it has to borrow money. The money is thus unavailable for private investment or consumption. Right now, companies and individuals are having trouble getting credit, which is a big reason for the downturn. But if the government borrows more, they will have an even harder time finding lenders. So the effort could be self-defeating.
That's a Nobel Laureate who doesn't understand that in a world of floating exchange rates/non-convertible currency, currency issuing governments spend by crediting bank accounts and the spending occurs BEFORE the sale of securities and the collection of taxes. Thus, gov't deficit spending ADDS to the net worth of the public in the form of higher holdings of Treasuries (which are assets), without any effect on the net financial position prior to that spending. Translation: it takes nothing away from the public's holdings of cash or other assets. Nor does it inhibit in any way the public's ability to invest their savings. If anything it adds to it because the government is a net payer of interest, meaning that the extent interest payments add to overall income, savings should be higher and, therefore, investment.
Remember, as stated in the Fed's manual: "A payment by the Treasury adds to the amount of reserves available to depository institutions." This dynamic is clearly stated right there and says, unequivocally, that spending by the Treasury ADDS to the money of the private sector.