Here’s my dime-store understanding of Keynes (which tells me, by the way, that I need to go reread the [book: General Theory]):
* Companies aren’t investing because they expect that in the near future, customers won’t be buying. They expect this for the completely justified reason that customers aren’t buying right now.
* So companies don’t put their money into new factories and new machines and so forth. Instead they put it in the bank.
* So they don’t hire new workers to man the new machines.
* Now there’s less money in the pockets of the workers. So they buy less.
* So rational companies look ahead and see more of the same: nobody’s buying, so they won’t be investing.
* And so on down the drain.
So the government steps in to halt the self-fulfilling prophecy. The government hires workers to pave the roads, build bridges, paint murals, etc. They give those workers, let’s say, $10,000 apiece. Since they’re largely on the poorer end of the economic ladder, they spend most of that money on food and other necessities. Let’s say they spend 80% of what the government pays them. So they spend $8,000 of that $10,000. Someone else has then earned $8,000; assuming the recipient is situated similarly to the spender, 80% of that $8,000 then becomes new spending. And so forth. The initial $10,000 becomes $50,000 through this process of multiplication. (In general, if people spend r% of what they earn, the initial investment gets multiplied by 100/(100-r).)
Now companies expect that things will be different. They expect that next quarter will look a lot like this one, and this one turned out not to be too bad. So they invest. They hire more workers. Those workers spend money. That money gets multiplied, as above. The pump has been primed, the economy is rolling again, and yay.
Here’s my question, though: shouldn’t we expect companies to know that the good times won’t last? Companies must be expected to know that business will only keep moving so long as the government is supplying the jobs, right? Likewise, those employees working at government-provided jobs know that their jobs — paving roads, building bridges, painting murals — are only temporary. To the extent that they have any control over it, they’re going to try to save that money for a rainy day; they know that a rainy day is just around the corner.
The only honest way I can see out of this is for the government to credibly commit to a certain amount of continuous job-creation until the economy has reached some pre-determined goal (GDP increasing by a 3% annualized rate per quarter or whatever). Once the economy is moving on its own, the government promises to stop making work; until then, it’ll do everything it can. This creates the right expectations.
On the basis of this argument, including the bit about the multiplier, I don’t see what the difference — from the perspective of getting the economy moving — would be between a) the government mailing $10,000 checks to a million newly unemployed people, and b) the government creating jobs for a million newly unemployed people. In both cases you’re putting money in the unemployed folks’ pockets, and you expect that they’ll spend roughly the same fraction in each case.
Obviously there are non-stimulus reasons to prefer employment to mailing a check: work is good for people’s self-esteem, crime goes down when people are occupied, and in any case we should be spending money to fix things that need fixing. But toward the goal of setting expectations about the future, the cash and the work seem identical.
So *is there* any stimulus explanation for not just giving people a check? And, to get to the earlier question: is the idea of a one-time stimulus — *any* one-time stimulus — just doomed from the start? If you don’t set the expectation that you’ll pay whatever is needed, for however long it’s needed, won’t minimally rational economic actors be too cautious about spending what they have?
I don’t know enough to answer your question, but I know that the Post-Keynesian / MMT folks are big on the cash stimulus idea. Most of them wanted to suspend Social Security taxes back in 2008.
Versus giving them a job? Sure. Aside from the reasons you mention (which I take it you consider to be “non-stimulus” explanations), investing in infrastructure can itself spur economic growth by reducing various transaction costs. Build new roads and improve others, now shipping is marginally cheaper, which could lower prices and spur consumption. Investment in R&D infrastructure particularly at least theoretically has huge potential future returns. Those I would consider to be stimulus explanations for not just giving people a check.
This is a great question and it dovetails with a concern I’ve been having. A lot of conservative politicians are critical of stimulus because they see it as having a negative psychological impact on industry (looming debt, short-term productivity and spending)… and then add to this the lingering promise of something like a carbon tax, fin-reg, or other corporate taxes. And it does seem that the psychological impact on corporations runs counter to the basic idea of stimulus (unless it were posed in the way you propose–which sounds theoretically tantalizing, but political impossible).
Well, the whole idea of macroeconomics — a term that didn’t really exist before Keynes, by the way; economic thought said that what was good for individual actors was good for everyone — is that entire economies can be driven into a ditch by entities acting individually rationally. So it’s rational, individually, for a given company to put its money in the bank rather than invest. But it’s collectively disastrous. So the government takes some of the resources out of the banks and puts them to effective use. If the money doesn’t get out into the economy, then there’s a bunch of machines just laying fallow. The U.S. is no less productive today than it was yesterday; in fact our productivity continues to increase, as companies make fewer employees do the same amount of work. So we’re in a collectively irrational spot that can only be fixed by a government that can compel certain behavior from otherwise free enterprise.
Financial regulation is of the same species. As we saw during the recent financial crisis, individually rational decisions on the part of individual CEOs or individual banks led to collective disaster that nearly brought all banks to decay. The only reason the industry survived is that the U.S. government jumped in and helped. It helped in a bad way, namely by insuring downside risk without requiring any better behavior out of banks. The idea behind any kind of financial regulation is to constrain individual behavior so that it doesn’t lead to collective disaster.
Global warming is left as an exercise for the reader. :-)
My question still stands, though, namely: if we commit to Keynesian demand stimulus, is there any way to make it work as a one-shot stimulus, or does it need to be ongoing?
Return on investment. #1 You give people a check, they spend it. Some economic value comes out of what they spend.
2 You give people a job and a check. They spend the check, plus make some sort of productive labor output. More economic value comes out of what they spend, possibly several times greater than that of #1.
2 makes it far more likely that you are going to come out ahead. With #1 the benefits you get from the stimulus could easily be outweighed by the amount that you’re taxing savers through deficit spending.