Dow 36000 Award

EconoSpeak: Hassett and the Paradox of Thrift::

I nominate Kevin Hassett for the worse argument yet against the Obama fiscal stimulus:

We are in the midst of a crisis caused by so many financial institutions borrowing too much money. Somehow, a critical mass of policy makers now believes that the correct response is for the U.S. government to borrow too much money.

Financial institutions lend money to those who wish to invest more than they save. Our current problem is not that there is too much private investment – rather it is that there is too little private investment. OK, financial institutions may have made certain loans that defaulted – to which they are now lending less. But that is not the same thing as “financial institutions borrowing too much money”.

As Keynes noted – when the private sector invests less than it saves, an insufficiency of aggregate demand may lead to a recession unless the public sector decides to engage in fiscal stimulus. Yet, Hassert is advocating fiscal restraint which would further increase the national savings schedule leading to the well known paradox of thrift. Herbert Hoover would be proud!

On top of this silliness, we get:

How could the deficit increase so much, so fast? Part of the story is the decline in revenue, which the CBO forecasts will be $166 billion less than it was in 2008, a 6.6 percent decline. But relative to 2000, revenue has actually increased from $2 trillion to a scheduled $2.4 trillion in 2009. The deficit has skyrocketed because spending has grown from $1.8 trillion in 2000 to a projected $3.5 trillion in 2009, fully 95 percent higher. Of course, all that happened mostly on a Republican watch.

Nominal revenues will have risen by 20%! Wow! Oh wait – the price-level will have risen by about 25% so real revenues will have declined even in absolute terms. Real revenues per capita or revenues as a percent of GDP – you know the drill! While it may be true that Federal spending relative to GDP increased during the Bush Administration – any suggestion that real Federal spending per capita doubled would be laughable in the extreme.

To which Brad Delong comments:

Any arguments that the American Enterprise Institute should not be shut down, the building razed, the rubble plowed under, and the furrows then sown with salt? Anyone? Anyone? Bueller?

Bloomberg take note as well: you have some credibility, but this type of thing burns it rapidly.