Grandma’s Kitchen ~ An Economics Lesson on Fiscal Policy

I remember my great grandmother’s farm-house kitchen. With a cast iron stove burning wood and chunks of coal, it was the only warm place in the whole house in the winter.

September 1, 2010 — I woke up this morning to a comment posted in response to an article I wrote some time ago. The article was on the latest global warming deniers’ crock, namely that more CO2 is good for the environment. The comment was on the negative aspects of government stimulus spending, which seemed to me to be irrelevant to the original posting until I reread my article. Yes, I did mention stimulus spending. I mentioned it in the context that I thought then and still do that the first priority for government at this time is acting to restore the economy, that making noise in opposition to established science on climate change or protesting the building of an Islamic center blocks away from Ground Zero for that matter is just distracting voters from the more immediate issue, the economy.

It is troublesome to me that, in their zeal to spread misinformation about Obama administration policies, people are plastering counter arguments and criticisms, usually riddled with false information and logical fallacies, everywhere on the Internet.

To the point — I thought I might bring my reader’s comment to the surface in the form of a new posting so that we all might have a chance to respond. My reader, who calls himself Warren, said, “Stimulus spending??? This is the surest way to destroy the economy. Stimulus spending consumes wealth, it does not create it. If stimulus spending had a net, long term, positive benefit, then why dont we just forget about the private sector and just keep stimulating through government spending?”

Obviously, Warren is a Libertarian who subscribes to the Austrian School of economic theory, else he is just parroting something he has heard from the likes of Ron Paul .

This was my response to Warren: “Speaking of stimulus… I remember my great grandmother’s farm-house kitchen. With a cast iron stove burning wood and chunks of coal, it was the only warm place in the whole house in the winter. I spent plenty of time playing on the floor of grandma’s kitchen, playing with her trusty mouse exterminator, Fluffy the cat. Fluffy loved to chase empty thread spools rolled across the floor. But like most good capitalists, she never got the hang of bringing ’em back.

Beside grandma’s galvanized steel kitchen sink was a small water pump. Next to the pump always sat a cupful of water. This was used to prime the pump, which was necessary before any amount of hand pumping would bring water up to the sink. If she or anyone else failed to refill the cup, she would have to go out to the rain barrel next to the house to get more “stimulus”. In the winter, the stimulus was frozen solid so she would have to chip away at it to bring small chunks of it in to melt on the stove. This took time. If the rain barrel was empty, she either had to trek down to the irrigation ditch a quarter-mile away or borrow some stimulus from a neighbor. Similarly, the economic policies of the past admini- stration have left us with an empty cup, so it’s going to take more stimulus spent over a longer period than anyone would want to get things flowing on their own again.

Once the economy is growing more robustly and people are again working for living wages, we must never again forget about grandma’s priming cup.”

Because every dollar spent becomes somebody else’s income, income to be spent or saved in varying amounts over and over again, spending, whether by the private  sector or by the government, does create wealth. This is called the Spending Multiplier concept, a well established basic principle of fiscal policy in macroeconomics. It is cousin to the Money Multiplier concept which focuses on expanding the money supply generated by bank lending. Spending in a market economy is important. It represents demand for goods and services, and it is demand after all that motivates businesses to expand production and rehire laid-off workers. Supply does not create its own demand, a la Say’s Law. No credible economist today believes that it does. You’re right about one thing though, Warren. Given that government’s current stimulus spending is being accomplished with borrowed money, it is creating ‘negative’ wealth. Let’s just hope that when the economy starts moving on its own again that lawmakers remember grandma’s priming cup and that they have the wisdom and resolve to never again leave it empty.

Please feel free to post a comment whether pro or con.

Published in: on September 1, 2010 at 10:43 am  Comments (2)  

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2 CommentsLeave a comment

  1. Good lesson. I liked the “stimulus” analogy from your grandma’s kitchen. The hypocrisy of the “Right” about this issue continues unabated. They had/have no problem continuing to run up the deficit for Iraq and Afghanistan because that is putting big bucks in the pockets of their wealthiest contributors. The stimulus money helps the “other guys”; the ones who don’t or can’t make the big contributions. “Something is rotten in the state of Denmark” and it smells like dead fish to me.

  2. Yeah… and those “other guys” are the ones who spend all or most of their disposable incomes. The wealthy save considerably more, and saving is not just deferred spending. Saving by the rich mostly leads the accumulation of wealth. This is why Republicans, representing the interests of their wealthy contributors and big business interests, advocate repeal of the inheritance (AKA “death”) tax, and renewal of the Bush/Cheney tax cuts which overwhelmingly favor the richest of Americans. Fishy smell indeed.

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