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Governments can't stimulate an economy (Read 2296 times)
John
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Governments can't stimulate an economy
Oct 18th, 2008 at 2:30pm
 
The simplest explanation for this is that the economy is the result of private, uninterrupted effort, and that any changes the government makes to this state is a perversion. Government spending/investment is forgone private spending/investment, and very rarely is there consensus over what government spending/investment is necessary.
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freediver
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Re: Governments can't stimulate an economy
Reply #1 - Oct 18th, 2008 at 2:40pm
 
Welcome to OzPolitic John.

There is plenty economists tend to agree on. Like the role of the reserve bank, which is to stimulate the economy when necessary, and slow it down when necessary. Government spending can do the same thing. The only problem with that is that governments tend to be too slow to react, and can't be trusted to act in the long term itnerests of the economy.
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John
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Re: Governments can't stimulate an economy
Reply #2 - Oct 18th, 2008 at 3:26pm
 
freediver wrote on Oct 18th, 2008 at 2:40pm:
Welcome to OzPolitic John.

There is plenty economists tend to agree on. Like the role of the reserve bank, which is to stimulate the economy when necessary, and slow it down when necessary. Government spending can do the same thing. The only problem with that is that governments tend to be too slow to react, and can't be trusted to act in the long term itnerests of the economy.


Can you explain your reasoning behind these arguments?
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Re: Governments can't stimulate an economy
Reply #3 - Oct 18th, 2008 at 3:49pm
 
Lowering interest rates stimulates the economy. Raising them slows the economy down. The reserve bank does this to prevent boom-bust cycles. So the effect is mostly short term. I guess you could still call it a perversion, but it's a whole lot better than a 'natural' economy.
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John
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Re: Governments can't stimulate an economy
Reply #4 - Oct 18th, 2008 at 4:04pm
 
freediver wrote on Oct 18th, 2008 at 3:49pm:
Lowering interest rates stimulates the economy. Raising them slows the economy down. The reserve bank does this to prevent boom-bust cycles. So the effect is mostly short term. I guess you could still call it a perversion, but it's a whole lot better than a 'natural' economy.


Then why not set interest rates at zero? Or increase government spending?
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Re: Governments can't stimulate an economy
Reply #5 - Oct 18th, 2008 at 6:12pm
 
If you overstimulate the economy, the growth becomes unsustainable. Rather than preventing a boom-bust cycle, you create one. It still has to be driven by the fundamentals. What the reserve bank does only effects the short term stuff.

For long term economic growth, investment in some form of capital (eg education, infrastructure) rather than consumer spending (eg government handouts) is the way to go. This goes for both private and public sector spending.
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John
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Re: Governments can't stimulate an economy
Reply #6 - Oct 18th, 2008 at 7:19pm
 
freediver wrote on Oct 18th, 2008 at 6:12pm:
If you overstimulate the economy, the growth becomes unsustainable. Rather than preventing a boom-bust cycle, you create one. It still has to be driven by the fundamentals. What the reserve bank does only effects the short term stuff.

For long term economic growth, investment in some form of capital (eg education, infrastructure) rather than consumer spending (eg government handouts) is the way to go. This goes for both private and public sector spending.


Central bank interest rate fixing doesn't so much "stimulate" the economy as it does distort the perception of available, lendable savings and cause malinvestments. When the target interest rate is lower than the market rate (which is dependant on the availability of savings and the demand for them), monetary expansion will occur to meet the excess demand. Prices will rise and business ventures that relied on low interest rates (ie. speculative activity) will no longer be viable when interest rates inevitably rise again.

At the end of the day there is nothing to gain by fixing interest rates, rather it is the market that should determine them. Any "stimulus" provided by fixing interest rates low will produce unproductive economic activity that doesn't create real wealth or improve an economy in the long run.

As far as government spending goes, it's pretty simple. It's a zero sum game. Money spent by the government is money not spent by the private sector. It is the private sector that creates real wealth, so to draw resources away from it and reallocate them is less optimal.
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Re: Governments can't stimulate an economy
Reply #7 - Oct 18th, 2008 at 8:15pm
 
At the end of the day there is nothing to gain by fixing interest rates, rather it is the market that should determine them.

Yes there is. We avoid another great depression.

Any "stimulus" provided by fixing interest rates low will produce unproductive economic activity that doesn't create real wealth or improve an economy in the long run.

If you only do it during a recession, that won't be the case.

As far as government spending goes, it's pretty simple. It's a zero sum game. Money spent by the government is money not spent by the private sector. It is the private sector that creates real wealth, so to draw resources away from it and reallocate them is less optimal.

Wrong. There is plenty of public sector spending that also creates real wealth.
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John
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Re: Governments can't stimulate an economy
Reply #8 - Oct 18th, 2008 at 9:02pm
 
freediver wrote on Oct 18th, 2008 at 8:15pm:
Yes there is. We avoid another great depression.


The great depression was caused when they deflated the money supply to try and realign its value with gold. It was not a natural occurrence. Even Bernanke admitted that.

freediver wrote on Oct 18th, 2008 at 8:15pm:
If you only do it during a recession, that won't be the case.


Why would it make a difference? The issue is the difference between the fixed rate and the market rate, not whether or not there is a recession.

freediver wrote on Oct 18th, 2008 at 8:15pm:
Wrong. There is plenty of public sector spending that also creates real wealth.


Again, why not have the government spend more then?
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Re: Governments can't stimulate an economy
Reply #9 - Oct 18th, 2008 at 9:54pm
 
The great depression was caused when they deflated the money supply to try and realign its value with gold. It was not a natural occurrence. Even Bernanke admitted that.

Nothing ever has a single cause. There were plenty of depressions. They may have all had different proximate causes, but they all had the same ultimate cause.

Why would it make a difference? The issue is the difference between the fixed rate and the market rate, not whether or not there is a recession.

Because people are far more careful about where they invest their money duiring a recession. The 'unproductive' investment tends to occur during the 'bubble'. The whole problem in a recession is that people are too hesitant to spend or invest.

Again, why not have the government spend more then?

Because there is only so much to go around, because people want to enjoy life now as well as investing for the future, and because there is a risk of overinvestment, and because of politics. I think the government should have held onto the handouts and spent them on infrastructure in a year or two when the labour shortage isn't as acute. This is why there was such a strong push for reserve bank independence - because governments can't always be trusted to do the right thing.
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tallowood
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Re: Governments can't stimulate an economy
Reply #10 - Oct 18th, 2008 at 10:17pm
 
John wrote on Oct 18th, 2008 at 9:02pm:
...
Why would it make a difference? The issue is the difference between the fixed rate and the market rate, not whether or not there is a recession.
...


Again, why not have the government spend more then? [/quote]

Does any bank have to follow CBR if it thinks that the market rate is different? BTW, I thought that CB is independent of government anyway.

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Re: Governments can't stimulate an economy
Reply #11 - Oct 18th, 2008 at 10:44pm
 
No, they don't have to, but that's not how it works. The reserve bank manipulates market forces to change the interest rate. It's in the interest of the banks to follow suit.
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Re: Governments can't stimulate an economy
Reply #12 - Oct 18th, 2008 at 10:56pm
 
freediver wrote on Oct 18th, 2008 at 10:44pm:
No, they don't have to, but that's not how it works. The reserve bank manipulates market forces to change the interest rate. It's in the interest of the banks to follow suit.


I suppose that any market stakeholder manipulates market and the bigger they are the greater is leverage. But that is what market nature is.
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Re: Governments can't stimulate an economy
Reply #13 - Oct 19th, 2008 at 6:19am
 
Nothing is worse for any economy, than a "free" market.

What is needed is a regulated market.

The free market advocates are the gunslingers in the wild west world of economics.
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Re: Governments can't stimulate an economy
Reply #14 - Oct 19th, 2008 at 10:16am
 
Well look at what happend in the US. They loan sharks pretty much lent money to anyone who wanted it and now look at the mess they're in.
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John
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Re: Governments can't stimulate an economy
Reply #15 - Oct 19th, 2008 at 2:30pm
 
freediver wrote on Oct 18th, 2008 at 9:54pm:
Because people are far more careful about where they invest their money duiring a recession. The 'unproductive' investment tends to occur during the 'bubble'. The whole problem in a recession is that people are too hesitant to spend or invest.


Rates can fall near the end of a recesion, but only because REAL interest rates would be lower. We're talking about fixing them below the real rates. Let's not forget that it was loose monetary policy that caused the downturn in the first place by encouraging business ventures that relied on an unsustainably low interest rate.

freediver wrote on Oct 18th, 2008 at 9:54pm:
Because there is only so much to go around, because people want to enjoy life now as well as investing for the future, and because there is a risk of overinvestment, and because of politics. I think the government should have held onto the handouts and spent them on infrastructure in a year or two when the labour shortage isn't as acute. This is why there was such a strong push for reserve bank independence - because governments can't always be trusted to do the right thing.


And you can trust the Reserve Bank? Don't you think it's slightly alarming that the total amount of money in existence has doubled over the last decade, thanks to the Reserve Bank?

The fact that you don't agree with what the government is spending taxpayers' money on demonstrates my point - that they can't allocate money or resources better than the private sector - they didn't spend your dollars where you would have valued them the most. MORE wealth would have been created had it been left in private hands. This is a proven statistical fact. The lower government expenditure is as a proportion of the economy, the faster the economy grows.
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John
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Re: Governments can't stimulate an economy
Reply #16 - Oct 19th, 2008 at 2:33pm
 
mozzaok wrote on Oct 19th, 2008 at 6:19am:
Nothing is worse for any economy, than a "free" market.

What is needed is a regulated market.

The free market advocates are the gunslingers in the wild west world of economics.


The biggest cowboys are those in government and the RBA.
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John
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Re: Governments can't stimulate an economy
Reply #17 - Oct 19th, 2008 at 2:51pm
 
Revenant wrote on Oct 19th, 2008 at 10:16am:
Well look at what happend in the US. They loan sharks pretty much lent money to anyone who wanted it and now look at the mess they're in.


I hope you're referring to the Fed, Fannie Mae, Freddie Mac, and all the other government entities involved. Where do you think the private lenders got all their money to lend from?
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Re: Governments can't stimulate an economy
Reply #18 - Oct 19th, 2008 at 3:55pm
 
Let's not forget that it was loose monetary policy that caused the downturn in the first place by encouraging business ventures that relied on an unsustainably low interest rate.

No it wasn't loose monetary policy that caused it. It was the monetary policy that prevented it from being far worse than it otherwise would have been. The interest rates were 'artificially' high for a long time before the bubble burst. You can thank the reserve bank for this, and for preventing a lot of unsustainable investment that would have made the recession far worse.

And you can trust the Reserve Bank?

More so than the government.

Don't you think it's slightly alarming that the total amount of money in existence has doubled over the last decade, thanks to the Reserve Bank?

Not really.

The fact that you don't agree with what the government is spending taxpayers' money on demonstrates my point - that they can't allocate money or resources better than the private sector

No it doesn't prove that. There are all sorts of situations where the government is or is not a better controller of spending. The fact that they get one thing wrong in my opinion does not justify such a blanket statement.

they didn't spend your dollars where you would have valued them the most

That is not the reason. In fact, the opposite is true.

MORE wealth would have been created had it been left in private hands. This is a proven statistical fact.

Crap.

The lower government expenditure is as a proportion of the economy, the faster the economy grows.

Generalisations are always wrong.
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Revenant
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Re: Governments can't stimulate an economy
Reply #19 - Oct 19th, 2008 at 4:04pm
 
John wrote on Oct 19th, 2008 at 2:51pm:
Revenant wrote on Oct 19th, 2008 at 10:16am:
Well look at what happend in the US. They loan sharks pretty much lent money to anyone who wanted it and now look at the mess they're in.


I hope you're referring to the Fed, Fannie Mae, Freddie Mac, and all the other government entities involved. Where do you think the private lenders got all their money to lend from?


Well obviously the buck stops with the government for allowing it to happen.
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