Business cycle and Fiscal Stimulus

Fiscal stimulus exacerbates the business cycle

Anything the government does free market does more efficiently.  Think of UPS vs the Post office.  Think of Google vs. umm the government could never create such an efficient tool as Google.

Some people believe that micromanaging the economy and business cycles from the top with a large fiscal stimulus is better than allowing natural market forces to adjust.  Think of the Union of Soviet Socialist Republics and you know this is not true. The government does not create or innovate as people do.

People say if we do not stimulate the economy with government money, there will be a recession, my reply is so what.  This is the natural sleep-wake cycle of an economy. To try to prevent it will only make matters much worse.  To use a Keynesian quote out of context, ‘in the long-run we are all dead’. We will really be in trouble in the long run when the government tries to manage the economy, it is game over.

With this huge fiscal stimulus, we have avoided some short term pain, but now we could have long term economic problems. In the long run, we will have debt, taxes, inflation and non-competitive businesses, and crowding out effect. Also, the support of inefficient companies stifles innovation. Normally when people are faced with a challenge, they innovate, but the government has eased this challenge and people will be less innovative. This last point is the biggest point.

  • There are always first and last receivers of the stimulus money. This equates to greater inequality. The people, who get it first get the benefit, while others who it trickles down to get crumbles. This is manifest in the Gini coefficient.

Fiscal lag

Fiscal stimulus has about a two year lag effect on the aggregate economy. By that time natural market forces would have put the economy back on track anyway.  Think about it.

The business cycle

  1. The government gets the idea that we are in a recession (often using lagging indicators like unemployment to measure the health of the economy, therefore, the recession is, in reality, more than 1/2 year old).
  2. Media creates news about the economy.
  3. Politicians react
  4. Laws and stimulus are created over the next half year.
  5. The money starts flowing over the next half-year but just starts.
  6. People’s expectations and spending patterns begin to change the following year. They refocus create energies away from innovation towards how can I get some of that feel-good government money.
  7. Business starts really flowing from the new stimulus in year three.

However, the problem is, it is like a high that pushes you to go farther than you should and will only exacerbate the boom and bust of any business cycle, guaranteed.

Natural forces, that is, entrepreneurs and people like you, in the aggregate are more capable of managing their own money than a centralized government.

  • Stimulus rewards the inefficient at the price of the productive.
  • Why should someone take $1,000 dollars from me and in the form of taxes and give it to someone else in the form of a stimulus or grant? Does not my life and economic situation matter too? I could use that money for my own capitalistic ventures that create value, for example, my backyard organic farm. Instead, it goes into the Trillion dollar black hole of the military for example, or some venture the government deems important.

Democracy and business cycles

I am an American living in a post-communist country, I can see first hand how government involvement in the market destroys a country: however, people,  individual people like you, fix it, just by acting on their own ‘enlightened self-interest’. Finding innovative solutions on their own.   People, rather than planned government action make life interesting and the economy healthy.

The whole idea of democracy is give power to the people, rather than an a central authority.

If you mess with this model or the sleep-wake rhythm of the economy, there will be a distortion of the natural business cycle course and you will have long term problems an economic pain.  Like a bear that is awoken prematurely from its hibernation.

There is no question in my mind that fiscal stimulus exacerbates the business cycle.

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