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Sunday, November 30, 2008
Craig Oliver: "reducing taxes doesn't put money in people's pockets;" Jim Flaherty: "Spend, baby, spend"
This clip of Craig Oliver's interview with Minister of Finance Jim Flaherty is simply astonishing.
And it's not only because Flaherty, a supposed fiscal conservative, brags about all the spending his government plans to pack into their January budget, but also because of this howler from Oliver at six minutes in when he stated in all seriousness that: "reducing taxes doesn't put money in people's pockets."
In a moment of clarity, Flaherty pointed out that "reducing taxes does precisely that–it leaves money in the pockets of consumers and the pockets of businesses," before going on with his big-spendin' braggin' and repetition of the Keynesian dogma that what the economy needs is more spending, private and public, in order to recover.
What Flaherty, those bank economists being quoted in the newspapers and all other disciples of John Maynard Keynes fail to take into account of in their understanding of macroeconomics is the factor of time. Bob Murphy explains the market process*:
It's useful to take a step back and just consider what happens every day in the worldwide market. There are billions of humans scattered over the planet. Some of us work on oil rigs, pulling up barrels of crude. Some of us work on farms, gathering wheat. Some of us work on oil tankers or drive tractor trailers, bringing the (somewhat) raw materials to others. As consumers, we only see the tail end of a "pipeline" that could be traced back many years. The finished goods you buy at the store are made of components that passed through probably thousands of different hands, in dozens of countries, before all coming together into the item you throw in your grocery cart.
Once we grasp the stunning complexity of the true "economic problem"—how all of this interlocking human activity is coordinated so that production flows smoothly and predictably—we see the absurdity of Keynesian pump-priming remedies. During a recession, it's not as if all output in all sectors falls by the exact same percentage. On the contrary, some sectors shrink more than others. This is because some sectors suffered huge losses, and they need to release some (or all) of their workers and other resources to more profitable sectors. This reshuffling takes time, especially because critical intermediate goods need to be produced so that operations further down the "pipeline" can resume.
The Keynesians are right that in a condition of "full employment," their proposals won't cause more physical TVs and pickup trucks to roll off the assembly lines. But even in a state of widespread unemployment, the Keynesian solutions don't help. To repeat, this is because we can't simply increase activity in all sectors by, say, 1% to raise output back up to pre-recession levels. Generally speaking, this is physically impossible. No matter how much money consumers or the government throw at it, Ford can produce 1,000 more Rangers only if it can purchase 4,000 more of the appropriate tires. And the tire producer in turn can only meet Ford's request if it can buy the appropriate amount of extra rubber. And the rubber producer can only do this if…and so on.
Read the rest.
*See: The Meaning of Market Process: Essays in the Development of Modern Austrian Economics by Eric and Israel M. Kirzner
Posted by Kalim Kassam on November 30, 2008 in Canadian Politics | Permalink
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Comments
Get ready for more of this nonsense.
Greg Mankiw is urging everyone to read Keynes; and Tyler Cowen (who I remember used to be some kind of libertarian) is all in favor.
And Inkless Wells recently claimed Harper had failed an econ test. Why? Because he refused to go along with the need for a fiscal stimulus, which apparently all economists agree will work.
Sigh.
Posted by: Craig | 2008-11-30 11:18:23 PM
"Greg Mankiw is urging everyone to read Keynes; and Tyler Cowen (who I remember used to be some kind of libertarian) is all in favor."
Tyler Cowen doesn't claim to be a libertarian anymore. At least he's honest. Libertarian or not, his blog's still one of the most interesting.
Posted by: Kalim Kassam | 2008-11-30 11:34:03 PM
Even with high tax rates, its astonishing that Canada with only 33 million people has a GDP of 1.17 trillion dollars no. 9 in the world. Just imagine how high economic growth in Canada would be if the tax burden was cut!
Posted by: Omar Abu Hatem | 2008-11-30 11:59:19 PM
The only effective fiscal stimulus that government (federal, provincial and local) can provide is to downsize, cut its spending, cut taxes and peel back regulations including minimum wage laws.
Posted by: Alain | 2008-12-01 12:15:22 AM
I'm not sure it's fair to say Flaherty is talking "spend, spend, spend."
The government was talking about the need for fiscal restraint in the Fiscal Update. The government has never sounded better.
Posted by: Matthew Johnston | 2008-12-01 12:29:55 AM
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