Justin I agree with you that the cash bonus was not the best way of spending the funds but the option taken by the government is still economically sound.

“Dollars squandered on plasma TVs” are only inefficient and unproductive on the first stage of spending. Don’t forget the multiplier effect. That $900 from the plasma turns into a benefit of thousands for the economy, some of which goes into efficient and productive spending.

Also don’t forget the paradox of savings. By spending the money and increasing the size of our economy assuming the proportion of savings stays the same (c.p.) the amount actually saved is greater. This increased savings is converted into greater investment as any ECON101 student would understand. So surly this increase in investment will help the economy for a more sustain benefit.

1) The ‘multiplier’ is a Keynesian myth. In real life there’s no such thing. Actual production has to occur before people can consume anything and this is only achieved through savings.

2) By ‘paradox of savings’ I assume you mean Keynes’ ‘paradox of thrift’, another fallacious concept. Spending can only come from prior saving. Let me ask you, if you had five peanuts and traded two for a chair (that someone else had to eat two peanuts to sustain themselves while producing), has savings increased?

Now, if your spending was “productive”, i.e. you bought a hammer that allowed you to produce more peanuts, it would be different. Unfortunately as the article suggests, this is unlikely to happen when government spends.

1) “The ?multiplier? is a Keynesian myth” - well be better tell 99% of uni’s around the world that they are teaching the wrong info!

2)Your peanuts example is incorrect as there is no savings! If the economy is made up of 50 peanuts (10x) and the current savings rate is 10%pa then the economy saves 5 peanuts a year. If after the Rudd money the size of the economy went to 60 peanuts and saving patterns didn’t change then 10% of 60 is 6 peanuts thus savings has increased benefiting the economy!

1) Yes, it’s a Keynesian Myth. For an absolute destruction of the concept, see Failure of the New Economics by Henry Hazlitt (page 135); for a much quicker example, consider this:

Where did Rudd get the money to “stimulate” us with? Every $1 in taxation removes something more than $1 of value from the economy, as desired consumption is replaced by government waste (and the bureaucrats have to eat somehow!). Now assuming the Keynesian multiplier, that $1 in taxation is subject to a negative multiplier, as its removal from the economy has a repeated, but necessarily lessening, effect.

The claim that the stimulus will result in “thousands” for the economy is rubbish and only applies the Keynesian multiplier to one side of the equation. This is one of the probelms I touched on with GDP: it doesn’t count both sides of the equation. If they really wanted to help the economy they would cut taxes (permanently) and reduce government spending, or “waste”, accordingly.

The whole multiplier is nonsense anyway, but this is the easiest way to refute it regarding “stimulus”. Read the Hazlitt book (just the multiplier chapter—it’s short) above for a complete demolition.

2) Again, where did Rudd get the peanuts? He took them from the economy, but failed to subtract that from GDP. If he borrows the peanuts (deficit), those are peanuts the private sector no longer has to invest (increases cost of borrowing). Likewise if he issues “peanut dollars” that are good for 1 peanut (printing money), he’s simply taken from anyone who holds peanuts.

The result of Rudd ‘returning’ money back to the economy, temporarily, is merely wealth redistribution that the people who pay most of the tax burden—the top 20%—will have to pay for in the future. Permanent tax cuts in line with permanent reduction of government expenditure would achieve the desired results far more effectively. Dressing up wealth redistrubution as “stimulus” is just a political trick.

Oh also, I like this example, can’t remember where I saw it though:

You walk into a casino and decide to sit down in front of a slot machine paying back 90%. You bring a notepad with you to record how you’re going, to track your personal “GDP”.

You “invest” your initial $100 and afterward count your “return”, $90, and write this amount in your notepad. You then “re-invest” the $90, which gives an $81 “return”. Using the magic muliplier, your personal GDP is now $100 + $90 + $81 = $271! Wow! But should you keep playing? I mean according to Keynes, it’s highly probable that you can further increase the level of your personal “GDP”, right?

Of course not and any sane economist would tell you that there’s still really only $100, of which you have $81 and the casino has $19. You didn’t “create” any real wealth, just fudged the numbers by not subtracting the loss.

At the end of the day, to have income for consumption one must first produce something useful that can be exchanged in the market! A government can only spend or invest what it first takes away from the private sector.