Government Stimulus, Illustrated

  • Solomon Foster

    To really capture it, there needs to be another panel between panels 2 & 3 where the guy takes a handful of the money off the shovel and crams it in his own pocket.

  • embuteer

    there needs to be an addition to that cartoon...a building that says "printing press"
    the figure can then stick his shovel into that outflow and put it in the "economy " box...
    the debt has increased by 20 trillion since 1961..

  • Matthew Teague

    You beat me to it.

  • progenitive

    yeah, it's not a perfect analogy, but does pretty well in 3 panels. I guess you would have to say it assumes taxation accompanies the spending.

  • ErikTheRed

    I usually use an analogy involving using a bucket to move water from one end of a pool to another. But the bucket leaks. A lot.

  • Peabody

    Mark Perry himself states that transferring water in a leaky bucket would be a better analogy.

  • kidmugsy

    You'd have to show where the leaks go. Unless it's axiomatic that they finally go to the Russians. Or the Jews. Or whoever is the whipping boy this week.

  • Zachriel

    The graphic does not properly represent a stimulus. What a stimulus does is take money from another box and add it to the economy. The other box might be savings or it might be borrowing, but it adds to the existing pile of money currently circulating in the economy.

    If there is no slack in the economy, it leads to inflation as the new dollars chase after the same goods. If there is no slack in the money markets, it leads to higher interest rates as borrowing chases after the same pool of money. Only if there is slack in the economy and slack in the money markets will adding money in this way act as a positive stimulus.

    -
    xposted Carpe Diem

  • Joe

    Paul Krugman says you are wrong
    In fact - paul krugman says that not doing enough of this is what has doomed Greece.

  • TruthisaPeskyThing

    Savings is not another box. It is part of the economy. If you take money from savings, you remove it from the part of the economy that was using the savings. (Note: we might have an interesting discussion if the savings is taken in the form on cash and stuffed in mattresses, but that is not the phenomenon that we are discussing.)
    A fiscal stimulus takes money from one part of the economy and gives to another -- along with a drag because of non-productive costs of the transfer. Those receiving the fiscal stimulus may be happy, but the fiscal stimulus does not improve the economy overall.
    Meanwhile, a monetary stimulus may be a different story. A monetary stimulus -- that is not inflationary -- lowers the cost of investment which increases the probability that the investment is profitable, and that increased probability increases the investments made, and that increased investment moves the supply curve to the right, and therefore the economy is stimulated.

  • Zachriel

    TruthisaPeskyThing: Savings is not another box.

    Take a simple case. A king has a treasure of gold, perhaps his father brought it home from the crusades, sitting in a box, literally, a box, a very nice box, but a box nonetheless. One day the king has a religious inspiration and decides to build a cathedral, so he takes the gold out of the box to finance the new cathedral, and the gold now enters into the active economy. A building boom spurs economic growth. Even subsistence farmers work a little harder to sell their surplus for extra cash. New technologies may be introduced, like flying buttresses.

    In modern terms, when there is an economic downturn, money is idled, money not contributing significantly to the economy. Interest rates presumably will drop, encouraging borrowing, which spurs the economy in normal circumstances. But when the entire economy is deflationary, it often makes sense to hold onto the cash as it will gain value without risk. It's money in a box.

  • Andrew Garland

    Also, spillage outside the box.

  • Just Thinking

    Wow! I can see why we have such problems with fundamentals of economics.
    If the king has a pot of gold and buys the services of farmers, the farmers are taking away their services in other areas and giving it to the king. (No increase in the nation's wealth.) Subsistence farmers always have the option to work harder and sell the surplus for extra cash. If they do so, they increase the wealth of the nation; but it is the extra work of them that increases the wealth, not the pot of gold.
    Why would they not work harder? It could be cultural, or it could be a lack of incentive to do so in the system of laws, privileges, and taxes. Even better than working harder: an entrepreneur - perhaps motivated because he gets to keep profits or perhaps motivated by the thought of a lordship title - develops a two-bottom plow so that the farmer can not only work his land quicker but also has surplus time to give to the king in his cathedral project. The wealth of the nation does increase when the productivity of its resources increases.
    In the real world, Spain tried the pot of gold route. It brought tremendous amounts of gold from the New World. And with its wealth of gold, it bought goods and services from neighboring countries. If one stays only with shallow analysis, one may think that Spain's economy grew because of the gold. But its economy did not grow -- it merely bought more from other countries and with that action, it brought inflation, primarily in Spain but that inflation also spread to neighboring countries. Meanwhile, England netted far less gold from the New World, but it encouraged entrepreneurship which quickly overwhelmed the gold advantage of Spain, and England became a much wealthier nation.

  • Zachriel

    Just Thinking: I can see why we have such problems with fundamentals of economics.

    You said there was no separate box of money. We pointed to a simple situation where there is, indeed, a separate box of money that is not currently in circulation.

    Just Thinking: Subsistence farmers always have the option to work harder and sell the surplus for extra cash.

    Not when there is no buyers to justify the extra labor. With the spending by the king, now idle labor, is put to work.

    Just Thinking: one may think that Spain's economy grew because of the gold.

    Indeed, Spain's economy grew tremendously, and they were the dominant power for centuries.

    Just Thinking: it encouraged entrepreneurship which quickly overwhelmed the gold
    advantage of Spain, and England became a much wealthier nation.

    Quickly, as in centuries, and fueled in part by stealing gold and silver from the Spanish.

  • TruthisaPeskyThing

    You confuse money with wealth. Note the statement that "savings is not a separate box."
    Your statement that lack of buyers justifies no more work reflects the fallacy into which Keynes fell. Application of Keynesian economics has revealed this fallacy.
    Spain had lots of gold and could buy things from other countries. That is different than its economy growing.
    Spain's power was relatively short lived, especially in terms of pace of development and change 500 years ago. The Spanish Armada was a disaster -- in 1588 -- a matter of decades since they started hauling in the gold. You may have problems identifying European countries that Spain defeated when "they were the dominant power."
    English pirates raiding Spanish gold was little and inconsequential to England's development. When England became powerful, it was their entrepreneurs that led them to wealth and power.
    If the king declared that two-ton rocks were money, the economy is not healthier because there is more money.
    Fiscal stimulus takes wealth from one sector to another. It does not make the economy healthier -- unless the government builds infrastructure that enhances the productivity of the private sector. Economics 101 talks about public goods and why the government provision of public goods (often infrastructure) is more feasibly supplied by the government rather the private sector.
    Monetary stimulus can be successful. Banks make loans to entrepreneurs believing that the increased production from the entrepreneur's investment will provide the wealth needed to repay the loan. The lower the interest rate, the more likely that the entrepreneur's investment will be successful.

  • Zachriel

    TruthisaPeskyThing: Spain's power was relatively short lived, especially in terms of pace of development and change 500 years ago.

    Spain was the greatest power in Europe for over a century, and a global power for over two centuries.

    TruthisaPeskyThing: You confuse money with wealth.

    Not at all. As with the king, wealth is traded for stimulus, in this case, gold locked in a treasure box, for the activity of workers building a cathedral.

    History shows that the building of cathedrals led to increased overall economic activity due to concentration of the workforce, workers working longer hours, the saving and investing of earnings, economies of scale, and technological innovation.

  • Just Thinking

    While ignoring the overall issue, you focus on a couple of statements and make irrelevant comments about them. You do not win discussions that way.
    Yes, I know that there is a common conception that Spain was the greatest power in Europe for a while, but its power was less than typically imagined. Spain could not pull off consistent victories against the Ottoman Empire -- the sick man of Europe. Spain had some victories against weak states it Italy -- Italy was not yet a country -- but not an impressive record there. Spain started gaining gold in earnest from the New World by the 1520s and 1530s, but by 1580's it suffered major defeat by England and later lost its war with France.
    Spain was able to buy soldiers, guns and loyalty with its gold, but its economy was not strengthened, so inflation and temporary strength via purchases were major feature of its gold.
    Europe's economic power came not from the building of cathedrals but from the rise of merchant class -- whose entrepreneurs supplanted lords and princes as the key decision makers in the culture.
    Yes. You are confusing money with wealth, and none of my fellow Economic professors would give you a passing grade. You apparently do not even realize that your gold-in-box story is not a fiscal stimulus but rather a monetary stimulus.

  • Zachriel

    Just Thinking: I know that there is a common conception that Spain was the greatest power in Europe for a while

    Well, that's because it was. The usual dates for Spain's greatest power are from 1521 to 1659, but Spain remained a major European power for generations afterwards. The Tercios were undefeated for over a century. They oversaw the one of the largest empires in world history, the sun never setting on the Spanish Empire.

    Just Thinking: Europe's economic power came not from the building of cathedrals but from the rise of merchant class

    The rise of the merchant class was obviously critical. Cathedrals formed the nucleus of modern towns and cities.