EXCELLENT Example on Government Stimulus!

Would the debts be "more paid off" if the stranger had stayed, the bill pass through all those hands, and upon returning to where it started, a vendor from out of town came into the hotel and presented an overdue bill to the owner for $100, whereupon the bill left town? No. The fact is, the money paid the debts due in every single case. The fact each person held the bill only a few minutes is immaterial

Sorry RD2, this isn't an example of government stimulus, it's an example of free enterprise. In government stimulus, the money doesn't do anything. It goes from the U.S. Treasury into the hands of a very few privileged recipients and disappears from the economy. No debts are paid, no business is generated, no ""stimulus" occurs. It is a scam.

In your scenario, one private investor came into town, and with very little money resolved a number of issues. That's not how the government works. The government doesn't work at all.

 

It seems to be that everyone in town really is out of debt and has had their problems solved. Who on the list is still in debt for the $100?

It looks like it worked pretty well - totally unlike government stimulus.

 

It is something they could have resolved on their own, stimulating everyone. To boil it down simply, if I owe you $100 and you owe me $100, we are even. Same as in the scenario. Just add more people. If "A" owes "B" the same amount that "B" owes "C", and "C" owes "A" that same amount, then everyone is even. Add in a couple more, and you have the OP. It has nothing to do with the stimulus.

Government stimuli do not work, but the illustration in the OP has nothing to do with it at all.

 

Keynesian economists believe that government deficit spending can increase economic activity and help an economy recover from a recession. Classical economists dispute this, focusing their attention on encouraging businesses to produce more. If Keynesians practiced their beliefs correctly, they could be right, but they have a chicken and egg problem that they do not understand.

My previous Forbes column showed why Keynesian stimulus as commonly attempted over the last thirty years in the U.S. and Europe does not work using a thought experiment that compared it to counterfeiting and theft. The essential problem is that deficit spending can be financed in three ways, only one of which will produce any economic stimulus. Naturally, no national governments are using the correct approach, which Lord Keynes actually outlined in his book. Here, I want to look in more depth at what would work, because that is relevant to where we are now.

Government deficit spending can in principle be accomplished in one of three ways. The spending that exceeds tax revenue can come from borrowing, printing money, or previously saved government revenue. Keynes recommended the third method, but governments today focus on the first two.

Deficit spending financed by borrowing does not create stimulus because the money that the government borrowed would have been borrowed by someone else and then spent by them. Money is just being shifted from the private sector to the public sector. Moving money from your left pocket to your right does not make you richer.

http://www.forbes.com/sites/jeffrey...cant-create-jobs-without-stealing-them-first/

 

The global recession and financial crisis have refocused attention on government stimulus packages. These packages typically emphasize spending, predicated on the view that the expenditure "multipliers" are greater than one—so that gross domestic product expands by more than government spending itself. Stimulus packages typically also feature tax reductions, designed partly to boost consumer demand (by raising disposable income) and partly to stimulate work effort, production and investment (by lowering rates).
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World War II defense spending offers a good measure of stimulus effects. Getty Images

The existing empirical evidence on the response of real gross domestic product to added government spending and tax changes is thin. In ongoing research, we use long-term U.S. macroeconomic data to contribute to the evidence. The results mostly favor tax rate reductions over increases in government spending as a means to increase GDP.

For defense spending, the principal long-run variations reflect the buildups and aftermaths of major wars—World War I, World War II, the Korean War and, to a much lesser extent, the Vietnam War. World War II tends to dominate, with the ratio of added defense spending to GDP reaching 26% in 1942 and 17% in 1943, and then falling to -26% in 1946.

Wartime spending is helpful for estimating spending multipliers for three key reasons. First, the variations in spending are large and include positive and negative values. Second, since the main changes in military spending are independent of economic developments, it is straightforward to isolate the direction of causation between government spending and GDP. Third, unlike many other countries during the world wars, the U.S. suffered only moderate loss of life and did not experience massive destruction of physical capital. In addition, because the unemployment rate in 1940 exceeded 9% but then fell to 1% in 1944, there is some information on how the multiplier depends on the strength of the economy.

For annual data that start in 1939 or earlier (and, thereby, include World War II), the defense-spending multiplier that applies at the average unemployment rate of 5.6% is in a range of 0.6-0.7. A multiplier less than one means that, overall, other components of GDP fell when defense spending rose. Empirically, our research shows that most of the fall was in private investment, with personal consumer expenditure changing little.

Our research also shows that greater weakness in the economy raises the estimated multiplier: It increases by around 0.1 for each two percentage points by which the unemployment rate exceeds its long-run median of 5.6%. Thus the estimated multiplier reaches 1.0 when the unemployment rate gets to about 12%.

To evaluate typical fiscal-stimulus packages, however, nondefense government spending multipliers are more important. Estimating these multipliers convincingly from U.S. time series is problematical, however, because the movements in nondefense government purchases (dominated since the 1960s by state and local outlays) are closely intertwined with the business cycle. Thus the explanation for much of the positive association between nondefense spending and GDP is that government spending increased in response to growing GDP, rather than the reverse.

http://online.wsj.com/news/articles/SB10001424052748704471504574440723298786310

 

No matter what the question, President Barack Obama is sticking to the position that all the economy needs to blast it out of the doldrums is another round of stimulus spending.

The first effort to stimulate the economy through massive spending didn't work out so well. Unemployment, which the president promised would not exceed 8 percent if the stimulus package were adopted, has been somewhere north of 9 percent for much of his presidency. Joblessness is a now national crisis while, on his watch, the debt to U.S. GDP ratio has reached one-to-one.

The president needs to take a long hard look at what he has been doing and, if he's smart, change course. The one he has the country on just isn't working. A new study from the Phoenix Center for Advanced Legal and Economic Policy studies explains why.

[See a collection of political cartoons on the economy.]

The study, "Can Government Spending Get America Working Again," looks back over 50 years of data to examine the effectiveness of government in creating jobs and shows how government spending has had zero effect on private-sector job creation in periods of economic sluggishness.

"Our study confirms from 50 years of economic data what most Americans already know firsthand," Phoenix Center President and study co-author Lawrence J. Spiwak said.

Government can't spend the country into prosperity. Instead, if we want to create more jobs, then we need to enact policies such as tax and regulatory reform to get the private-sector investing in America once again.

http://www.usnews.com/opinion/blogs...her-study-shows-stimulus-spending-doesnt-work

 

The production had already been done. There were goods and services offered on credit. The $100 made its rounds and paid those debts. Again, government doesn't pay anything with stimulus. The money never gets where it's supposed to go. I appreciate your efforts to make an illustration, but this one doesn't work.

And it's obvious I'm not the only one who sees the flaws in the scenario as representing government stimulus, yet I'm the one who gets yelled at?

 

I wonder what would have happened if anyone in that scenario had forgiven the one who owed them....

And I wonder how the analogy works if any if the legitimate business owners had simply written off the debt as a loss on their taxes....

 

I'm a counselor. I can't help it. :laugh: