[S]timulus spending is the Pascal’s Wager of economics. Seventeenth century philosopher Blaise Pascal couldn’t prove God existed, but figured he might as well be devout since, if there is a God, he’s saved from damnation. If there wasn’t, well, no harm in trying. Politicians see stimulus spending the same way. They can’t prove it works, but if they sit on their hands during a downturn, they know they’ll be blamed for inaction should things turn worse. If and when the economy recovers, as it has here, the government’s happy to take credit. And if more misery comes? They can at least claim to have staved off larger calamity — which is how it’s gone in the U.S., where they’re now spending their third stimulus package in two years.
Politicians are only acting rationally. Last year, they were convinced they faced another Great Depression. [. . .]
Get used to this. Since the narrative that stimulus spending pulled us back from the abyss works for Ottawa, it virtually guarantees that, when dark economic clouds are again sighted from Parliament Hill, we’ll see this routine recur: Dire recession warnings from politicians, followed by stimulus as insurance to cover political hides from any economic blame. As long as future taxpayers get the bill, via future debt payments, it’s as risk-free a gambit as Pascal’s: The latest stimulus added tens of billions in national red ink with little political distress for the Tories.
Kevin Libin, “The Stimulus Bluff: There’s Mounting Evidence That Government Spending Has Had No Impact On The Economic Recovery. Too Bad Politicians Aren’t Listening”, National Post, 2010-06-01
June 1, 2010
QotD: The Pascal’s Wager of Economics
March 23, 2010
Stimulus did little, private sector did much more
Despite all the expensive ads (especially noticeable during the Vancouver Olympic coverage), it wasn’t the federal government’s stimulus package that has been creating jobs: it was the private sector:
Canada’s economic fortunes have seen a dramatic turnaround in the last year, but according to a new study by one of the country’s leading think-tanks, it had little to do with the federal government’s $47.2-billion Economic Action Plan.
The Fraser Institute released a study Tuesday that found that government stimulus packages contributed only 0.2 percentage points to the rise in GDP between the second and third quarter of 2009 and nothing between the third and fourth quarter.
The group found that it was private-sector investment and increased exports that were the driving forces behind the change in GDP growth.
“Although the federal government has repeatedly claimed credit for Canada’s improved economic performance in the second half of 2009, Statistics Canada data show that government spending and investment in infrastructure had a negligible effect on the country’s improved economic growth,” said the Fraser Institute’s senior economist, Niels Veldhuis.
Here is the news release from the Fraser Institute.
This shouldn’t be a surprise: the stimulus was, and continues to be, a media exercise much more than it was an economic plan. As with any outcry in the mass media, the government had to be seen to be doing something, regardless of the likely success. The illusion of positive motion was necessary, and the federal government knows it has little wiggle room as far as the mainstream media is concerned — doing nothing was not going to be an acceptable choice, even if doing nothing was the “correct” response.
The government can’t really “create” jobs — although it certainly can destroy ’em — most of the jobs “created” in response to government funding are going to go away as soon as that funding dries up. There’s no economic justification for them to exist, absent the stimulus money. If there was an economic justification, private employers would have created them (where not hindered by government action of one form or another, that is).
The increase in public sector employment is unsustainable: the money to pay salaries and benefits (ahem), training, equipment, and facilities all has to be taxed from individuals and companies. The more public sector jobs, the greater the drain on the private sector. The greater the burden placed on the private sector, the slower the growth of the economy. As you approach the “break even” point, where the private sector can no longer fund all the demands from the public sector, the economy gets more and more sluggish — no sane private employer is going to expand business if there’s no profit to be made. No expansion means no new jobs.
It might be possible for us all to live by “taking in one another’s laundry”, but it’s not possible for us all to live by approving permission forms, having meetings, and bureaucratic empire-building.
November 11, 2009
Contrarian investment strategy: short Chinese stocks
I’ve been skeptical of the official Chinese government economic statistics for quite some time, so I find articles like this one to be quite believable:
Chanos and the other bears point to several key pieces of evidence that China is heading for a crash.
First, they point to the enormous Chinese economic stimulus effort — with the government spending $900 billion to prop up a $4.3 trillion economy. “Yet China’s economy, for all the stimulus it has received in 11 months, is underperforming,” Gordon Chang, author of “The Coming Collapse of China,” wrote in Forbes at the end of October. “More important, it is unlikely that [third-quarter] expansion was anywhere near the claimed 8.9 percent.”
Chang argues that inconsistencies in Chinese official statistics — like the surging numbers for car sales but flat statistics for gasoline consumption — indicate that the Chinese are simply cooking their books. He speculates that Chinese state-run companies are buying fleets of cars and simply storing them in giant parking lots in order to generate apparent growth.
Back in 2004, I wrote:
While there is no doubt that China is a fast-growing economy, the most common mistake among both investors and pundits is to assume that China is really just like South Carolina or Ireland . . . a formerly depressed area now achieving good results from modernization. The problem is that China is not just the next Atlanta, Georgia or Slovenia. China is still, more or less, a command economy with a capitalist face. One of the biggest players in the Chinese economy is the army, and not just in the sense of being a big purchaser of capital goods (like the United States Army, for example).
The Chinese army owns or controls huge sectors of the economy, and runs them in the same way it would run a division or an army corps. The very term “command economy” would seem to have been minted to describe this situation. The numbers reported by these “companies” bear about the same resemblance to reality as thos posted by Enron or Worldcom. With so much of their economy not subject to profit and loss, every figure from China must be viewed as nothing more than a guess (at best) or active disinformation.
Probably the only figures that can be depended upon for any remote accuracy would be the imports from other countries — as reported by the exporting firms, not by their importing counterparts — and the exports to other countries. All internal numbers are political, not economic. When a factory manager can be fired, he has his own financial future at stake. When he can be sentenced to 20 years of internal exile, he has his life at stake. There are few rewards for honesty in that sort of environment: and many inducements to go along with what you are told to do.
Under those circumstances, any growth figures are going to be aggregated from all sectors, most of which are under strong pressure to report the right numbers, not necessarily corresponding with any real measurement of economic activity. So, if the economic office wants to see a drop in the economy, that’s what they’ll get.
Basing your own personal financial plans on numbers like this would quickly have you living in a cardboard box under a highway overpass. Companies in the soi-disant free world have shareholders or owners to answer to. Companies in China exist in a totally different environment.
Five years on, there’s not much (except a few outdated details) that I’d bother changing.
H/T to Ghost of a Flea for the link.
