Originally Posted by spence
Transfer payments aren't included just so you don't count the same money twice. Just because the recipients don't produce they certainly do still consume.
That they consume doesn't mean they are adding something to the economy or to GDP. The transferred money just allows different recipients than those from whom it was taken to use it for consumption. There is no added money to be spent, just different consumers spending the transferred amount. The Keynesian multiplyer effect, in my opinion, is bogus. Postulating that as the same money is spent and respent a number of times, each instant adds to the national income so that, $100, for instance, initially spent effectively becomes say $300 after a number of transactions doesn't take into account that every time a given consumer spends it, it is no longer in his possession. It is still $100, moving down the line, shrinking by factors such as taxing and saving. No extra money has been added to the gross national income. Every transaction expands the income of one party, but contracts that of the other. No net gain is accrued. And contrary to your assertion, according to Keynes, the same money IS not only counted twice, but more so. So there is no addition to GDP, therefor no reason to add it to GDP.
On the other hand, if government spends borrowed money rather than tax money to fund its "programs," that is new money which does add to GDP. Unfortunately, it also adds to the debt load and eventually contracts GDP to pay for interest, which money comes from more taxation, which shrinks the private sector addition to GDP (making it a wash monetarily but contracting the ability of the private sector to expand). Or it borrows more to pay for debt thus raising the national debt. Apparently, the "Keynesian" economists see some magic formula in all this that will solve itself--they reject the "invisible hand" of classical economics, and replace it with the magic hand of Keynesianism.
Can the government aid the market in expanding? Absolutely. A sort of multiplyer effect can work not by merely circulating the same existing money supply, but by multiplying/adding to it to meet the demand of a larger population of consumers for MORE circulating money, not just the same limited supply that just changes hands. If that supply meets the demand, markets can organically expand. If too much money is "printed" that will exceed the need for expansion creating excess money, ergo inflation.
I don't think anyone intended the Stimulus to generate organic growth, rather it's a stabilization mechanism to prevent lasting damage and to this purpose I think it was successful.
Lasting damage to whom? Was the expansion of the already untenable national debt a lasting damage? And how can we tell so soon whether the entire cycle of damage is lasting? And what would be more financially difficult to correct, bank failure or government failure? Or have we reached a point big government and big business and big banks are so interconnected that they are indistinguishable? Is this state of affairs a lasting damage to a free market?
The rest of it just comes down to a belief in Keynes or not.
-spence
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